SIPP Drawdown and remaining tax allowance.

JohnB47

A relative has a cash only SIPP with Hargreaves Lansdown (HL) that has just been placed in drawdown, with the 25% tax free amount to be paid into their bank account shortly.

They can now tell HL (by telephone only it seems) how much they want to draw down each month. Their tax free amount (yearly tax allowance minus taxable income) is £1969.80

Bearing in mind that this is now mid June, how do we work out how much they can draw down, for each month of the current tax year, to ensure no tax is due? 

What I mean is that if this had been arranged right at the start of this tax year, the drawdown amount would have been simply £1969.80 divided by 12 = £164 per month. But there are only nine full months left in this financial year, so presumably they can draw down more than £164 per month until April 2024?

If that's correct, how to calculate that?

Just go for £1969.80 divided by 9 = £218 maybe?

Dazed_and_C0nfused

JohnB47 said:

A relative has a cash only SIPP with Hargreaves Lansdown (HL) that has just been placed in drawdown, with the 25% tax free amount to be paid into their bank account shortly.

They can now tell HL (by telephone only it seems) how much they want to draw down each month. Their tax free amount (yearly tax allowance minus taxable income) is £1969.80

Bearing in mind that this is now mid June, how do we work out how much they can draw down, for each month of the current tax year, to ensure no tax is due? 

What I mean is that if this had been arranged right at the start of this tax year, the drawdown amount would have been simply £1969.80 divided by 12 = £164 per month. But there are only nine full months left in this financial year, so presumably they can draw down more than £164 per month until April 2024?

If that's correct, how to calculate that?

Just go for £1969.80 divided by 9 = £218 maybe?

Assuming this will the first ever taxable payment from this SIPP then the emergency tax code (1257L) will be used on the first payment so no tax would deducted on the first £1,048.

What happens next will to some degree depend on what the other taxable income of £9,340/£10,600 is - can you clarify this (into separate amounts if different types of income).

And has this person applied for Marriage Allowance?

JohnB47

Dazed_and_C0nfused said:

JohnB47 said:

A relative has a cash only SIPP with Hargreaves Lansdown (HL) that has just been placed in drawdown, with the 25% tax free amount to be paid into their bank account shortly.

They can now tell HL (by telephone only it seems) how much they want to draw down each month. Their tax free amount (yearly tax allowance minus taxable income) is £1969.80

Bearing in mind that this is now mid June, how do we work out how much they can draw down, for each month of the current tax year, to ensure no tax is due? 

What I mean is that if this had been arranged right at the start of this tax year, the drawdown amount would have been simply £1969.80 divided by 12 = £164 per month. But there are only nine full months left in this financial year, so presumably they can draw down more than £164 per month until April 2024?

If that's correct, how to calculate that?

Just go for £1969.80 divided by 9 = £218 maybe?

Assuming this will the first ever taxable payment from this SIPP then the emergency tax code (1257L) will be used on the first payment so no tax would deducted on the first £1,048.

What happens next will to some degree depend on what the other taxable income of £9,340/£10,600 is - can you clarify this (into separate amounts if different types of income).

And has this person applied for Marriage Allowance?

Thanks.

Can you explain where you got the £1048 figure from?

The only taxable income is the full new State pension of £10,600.20 That's how I got the figure of £1969.80 (£12570 minus £10,600.20).

There was a transfer of tax allowance to spouse in previous years but this was undone prior to April this year.

Dazed_and_C0nfused

The £1,048 is the monthly tax code allowances available when the emergency tax code is used (£12,579 ÷ 12).

Once HL have reported the first (taxable) payment to HMRC then an updated tax code should be issued automatically.

From what you've posted this is likely to be 198L meaning that by 5 April 2024 £1,980 can be taken without there being any tax liability.

How this can be spread out over the year to avoid tax being deducted then refunded (by HL) will depend on what the first payment is.  How much (taxable) pension does she plan on taking as the first payment?

The above assumes the State Pension started in the previous tax year.

boingy

It's a slightly daft thing with HMRC and tax codes. Your pension company need a tax code from HMRC but the only way to get one is to make the first payment and apply the emergency tax code. That triggers HMRC to give you a code. You will eventually get any overpaid tax back - you can apply direct to HMRC or wait until tax code corrects it, probably next year. or if you do a tax return it will get sorted there. However, if you can afford to do without the regular payments for a couple of months the best thing to do is to make a one off withdrawal of a small amount, say £100. That will get you a tax code and subsequent payments should be accurately taxed.

Then just divide your remaining tax free allowance by the remaining months up to April and withdraw that regularly each month. Note that you often have to give pension companies more than a month to set up the payments. Next tax year you will have a proper tax code from the start so you can just take one twelfth of the amount each month. 

I learned this the hard way. My first ever withdrawal was near the end of the tax year when I made a single withdrawal equivalent to my remaining personal tax allowance to "use it up". I don't know exactly what rate it was taxed at but the deduction amount was eye-watering. It took about 5 weeks to get it refunded from HMRC. One easy form, one long wait.

JohnB47

Thanks both. 

'Dazed and Confused':

Well, the first payment is likely to be the same as all the others - we're talking about a fixed monthly drawdown. And it's likely to not be vastly above £100. (somewhere between £164 and £218). So I'm not sure where 'first payment' comes into it. Bear in mind that this will be money taken from a drawdown account, 25% tax free having been taken out at drawdown. So I'm not sure why you ask "How much (taxable) pension does she plan on taking as the first payment?".

'Boingy': You say "the best thing to do is to make a one off withdrawal of a small amount, say £100". So wouldn't the suggested amounts, somewhere between £164 and £218, meet that need? So you are saying my relative would phone up HL and ask for, say, £100 as a one off withdrawal, then sort out the tax stuff, and only then phone them up again and ask for a regular monthly payment to be made (after doing the calculations you mentioned).

This seems all very complicated. I though it would be easy.

Surely just working out the most that could safely be taken out as monthly payments without triggering tax and asking HL to set that up would suffice. Bearing in mind that some tax would initially be triggered and that this would have to be reclaimed.

Dazed_and_C0nfused

The amount of the first payment determines if any tax will be deducted from it as the pension company will always operate the emergency tax code (1257L) on the first payment.

So if the first payment will only be say £200 then no tax will be deducted as use of the emergency tax code means tax is only deducted above the first £1,048 (of taxable income).

This first payment is likely to result in on ongoing tax code of 198L which means providing the annualised amount of (taxable) pension income doesn't exceed £1,989 then no tax will be deducted.

To calculate the annualised amount you need to look at the total taxable pension in the latest tax period and convert that to an annualised amount.

So £200 taken during tax month 3 (period 6 June 2023 to 5 July 2023) is an annualised amount of £800.

If a further £200 is taken in month 4 that will equate to annualised income of £1,200.

And so on each month.  If she keeps within the tax code allowances by month 12 (6 March 2024 to 5 April 2024) then no tax will be deducted.

If she takes a small first payment there is a chance you might need to amend her estimated pension income on her Personal Tax Account to ensure the correct tax code.
NB.  It would be correct based on the small payment but if you plan on taking larger payments in future that might be something you need to update on her PTA.

JohnB47

Ah thank you Dazed and Confused. I understand better now. I need time to think now. Cheers.

JohnB47

Hi again. OK, Dazed and Confused, I need to better understand this bit:

"To calculate the annualised amount you need to look at the total taxable pension in the latest tax period and convert that to an annualised amount.

So £200 taken during tax month 3 (period 6 June 2023 to 5 July 2023) is an annualised amount of £800.

If a further £200 is taken in month 4 that will equate to annualised income of £1,200."

Can you explain how those £800 and £1200 figures are arrived at? I can't see a mathematical relationship.

As said before, the amount of free allowance for this tax year is £1969.80

I'm just trying to work out if £200 is taken every month from, say, 28th July would that incur tax.

Also, sorry, another question. It seems from your replies that drawdown doesn't have to be a regular amount each month. Can it be done as individual amounts, from time to time, by request over the phone? (HL don't seem to provide an online means to do the drawdown bit - they suggest telephoning them).

Thanks for the help.

Dazed_and_C0nfused

So £200 taken during tax month 3 (period 6 June 2023 to 5 July 2023) is an annualised amount of £800.

If a further £200 is taken in month 4 that will equate to annualised income of £1,200."

Can you explain how those £800 and £1200 figures are arrived at? I can't see a mathematical relationship

So £200 after 3 months is an average of £66.66/month.  Which is an annual rate of £800.

And another £200 in month 4 and you have a total of £400 after 4 months.  Which is an average of £100/month and an annual rate of £1,200.

As far as the amounts which can be taken that probably depends on your provider.  Different providers will have different policies and procedures for DC funds.  

JohnB47

Dazed_and_C0nfused said:

So £200 taken during tax month 3 (period 6 June 2023 to 5 July 2023) is an annualised amount of £800.

If a further £200 is taken in month 4 that will equate to annualised income of £1,200."

Can you explain how those £800 and £1200 figures are arrived at? I can't see a mathematical relationship

So £200 after 3 months is an average of £66.66/month.  Which is an annual rate of £800.

And another £200 in month 4 and you have a total of £400 after 4 months.  Which is an average of £100/month and an annual rate of £1,200.

As far as the amounts which can be taken that probably depends on your provider.  Different providers will have different policies and procedures for DC funds.  

OK, I understand. That's weird, I must say.

I'm wondering if talking a small initial payment is the way to go, as suggested by Boingy.  I haven't worked out the sums but starting to take £200 a month from end of July would soon use up her spare tax allowance.

Thanks for all the help folks. Some tax stuff is a very obscure area I've discovered.