First pension withdrawal. Tax.

Rollingonandon

Hi, just made my first withdrawal from my SIPP. I've taken £10000 out. 
I'm receiving my state pension £10600. PA
Rental income Approximately £7000.
Self employed Approximately £9000.
On the payslip they've sent me, the tax stopped was £1952.06.
My tax code is 1257L.
I'm just trying to understand how it's come to this amount.

TadleyBaggie

Your tax code should be way less due to the state pension being paid gross.

Dazed_and_C0nfused

TadleyBaggie said:

Your tax code should be way less due to the state pension being paid gross.

Not on the first payment.

Dazed_and_C0nfused

Rollingonandon said:

Hi, just made my first withdrawal from my SIPP. I've taken £10000 out. 
I'm receiving my state pension £10600. PA
Rental income Approximately £7000.
Self employed Approximately £9000.
On the payslip they've sent me, the tax stopped was £1952.06.
My tax code is 1257L.
I'm just trying to understand how it's come to this amount.

It's a mix of tax code allowance (£1048), 20% and 40% tax (annual equivalent being £120,000)

Rollingonandon

Thanks for replies. Can you explain what you mean by £1048. Is that the amount of the tax paid at 20%? 
What I thought was going to happen.
£10000 - £2500 = £7500
£7500 - 20% Tax £1500 = £6000.
But it doesn't work out that way.

Dazed_and_C0nfused

In your op you said you taken £10,000 and queried the tax.

Do you mean you only actually took £7,500?

The £1,048 is one month of tax code allowances when the emergency tax code (1257L) is used.

12579 ÷ 12 = £1048.25.

You can use this calculator.

http://payecalculator.hmrc.gov.uk/PAYE0.aspx

molerat

The tax code used would be 1257LM1. £1048.26 is the monthly tax free amount with a 1257 tax code.  £7500 - £1048.26 = £6451 taxable, £3142 (1/12th of £37704) taxed at 20% (£628.46)  and £3309 taxed at 40% (£1323.60) = £1952.06

The first withdrawal from a pension is always at 1257LM1 as set by HMRC regulations.  A code will then be sent to the pension co for further use, likely BR in your case.  If you had taken less than £1048 taxable then no tax would have been deducted and the code would have been available for the next withdrawal meaning the correct £1500 tax would be deducted.

xylophone

The 40% rate has been applied because the withdrawal is being treated as though it were a regular monthly payment rather than a one off lump sum.

https://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

Give HMRC a ring at 8am in the morning to sort out how you will pay tax going forward.

At the moment your SP is not being factored in to your situation and neither (it appears) is your other income?

Pat38493

OK but won’t OPs tax code be changed by HMRC on the next withdrawal once HMRC figures out what’s going on?  I’ve seen plenty of posts that tax is usually “wrong” on the first withdrawal.

Rollingonandon

I took £10000. There is the 25% tax free taken off the £10000. Which leaves £7500.
So the £1048.25 is one month of my tax free allowance.
Can you explain how they reached the tax amount I paid.
Are they assuming that the £7500 is going to be my monthly income?

molerat

Pat38493 said:

OK but won’t OPs tax code be changed by HMRC on the next withdrawal once HMRC figures out what’s going on?  I’ve seen plenty of posts that tax is usually “wrong” on the first withdrawal.

HMRC will issue a code within a day or two of being notified of the withdrawal.