UFPLS withdrawal, savings interest and tax

15Manor

I am planning on starting to withdraw from my SIPP this year. I believe I can withdraw £16760 without paying tax (have not and don't plan to do a lump sum withdrawal and I have no other income) however I will have over £3000 of unwrapped savings interest (already maximised ISA). I just can't work out if my tax free 25% of pension "comes off first" as it were or my total income of at least £19760 would negate the starting rate for savings.
Many thanks

Doctor_Who

Ignore the 25% TFC. The taxable part of the UFPLS will use up the personal allowance (if no other income) and the £3K of savings interest will be taxed at 0% in the starter savings rate band.

https://www.moneysavingexpert.com/savings/tax-free-savings/

Edit: Emergency tax may well apply to the UFPLS withdrawal and can be claimed back from HMRC.

15Manor

Thank you for your quick response. I assume in this case TFC means Tax Free Component? I am prepared for emergency tax, I was planning on drawdown in March but was wondering about reducing my drawdown or switching savings to Premium Bonds, you have reassured me I don't need to do either.
Thanks again.

Doctor_Who

TFC = tax free cash. If you do UFPLS for £16K, then £4K will be TFC and will be of no interest to HMRC. The pension provider will notify HMRC of the £12K taxable pension income (emergency tax will likely be applied), but when the year end tax calculations are done the £12K will fall within the personal allowance (assuming a standard PA) and no tax will be due. You then have the £5K starter savings rate band and £1K PSA to use for savings interest.

You can mitigate emergency tax by taking a small UFPLS withdrawal (say £1000) and then wait for your tax code to be updated by HMRC.

waveyjane

Doctor_Who said:

You can mitigate emergency tax by taking a small UFPLS withdrawal (say £1000) and then wait for your tax code to be updated by HMRC.

Just a question on this point: I assume this is the "month 1 problem", which I was reading about here? They seems to imply there is a difference between UFPLS draw down and simply taking regular payments - but I'm not sure. 

molerat

waveyjane said:

 They seems to imply there is a difference between UFPLS draw down and simply taking regular payments - but I'm not sure. 

Not really. Even taking regular payments the first will be taxed at 1257LM1. The only safe way if you want a lump sum is to take a small payment below £1048 taxable at any time in the year and a big lump in March

dunstonh

waveyjane said:

Doctor_Who said:

You can mitigate emergency tax by taking a small UFPLS withdrawal (say £1000) and then wait for your tax code to be updated by HMRC.

Just a question on this point: I assume this is the "month 1 problem", which I was reading about here? They seems to imply there is a difference between UFPLS draw down and simply taking regular payments - but I'm not sure. 

The first access to the 75% element of the pension will be subject to LM1.   It doesn't matter if you are monthly, half yearly, yearly or ad-hoc.  

The only difference is that monthly will correct itself over the remainder of the tax year as by month two, the correct tax code will be in place.

Doctor_Who

molerat said:

waveyjane said:

 They seems to imply there is a difference between UFPLS draw down and simply taking regular payments - but I'm not sure. 

Not really. Even taking regular payments the first will be taxed at 1257LM1. The only safe way if you want a lump sum is to take a small payment below £1048 taxable at any time in the year and a big lump in March

This has been my approach to date. I took ~£1300 UFPLS (~£975 taxable) under tax code 1257LM1 and paid no tax. HMRC then updated my tax code with the pension provider and I plan to take a larger UFPLS in March when I have the maximum available personal allowance (minus the ~£975 already used). That way I hope the tax is calculated correctly without over/under payment.

eastcorkram

dunstonh said:

waveyjane said:

Doctor_Who said:

You can mitigate emergency tax by taking a small UFPLS withdrawal (say £1000) and then wait for your tax code to be updated by HMRC.

Just a question on this point: I assume this is the "month 1 problem", which I was reading about here? They seems to imply there is a difference between UFPLS draw down and simply taking regular payments - but I'm not sure. 

The first access to the 75% element of the pension will be subject to LM1.   It doesn't matter if you are monthly, half yearly, yearly or ad-hoc.  

The only difference is that monthly will correct itself over the remainder of the tax year as by month two, the correct tax code will be in place.

You've got more confidence in HMRC than I have.

molerat

eastcorkram said:

dunstonh said:

waveyjane said:

Doctor_Who said:

You can mitigate emergency tax by taking a small UFPLS withdrawal (say £1000) and then wait for your tax code to be updated by HMRC.

Just a question on this point: I assume this is the "month 1 problem", which I was reading about here? They seems to imply there is a difference between UFPLS draw down and simply taking regular payments - but I'm not sure. 

The first access to the 75% element of the pension will be subject to LM1.   It doesn't matter if you are monthly, half yearly, yearly or ad-hoc.  

The only difference is that monthly will correct itself over the remainder of the tax year as by month two, the correct tax code will be in place.

You've got more confidence in HMRC than I have.

When I took my first small payment the correct tax code was applied to the pension account 2 days later.  It is automatic computer generated, only a complicated tax scenario would cause a problem.

dunstonh

eastcorkram said:

dunstonh said:

waveyjane said:

Doctor_Who said:

You can mitigate emergency tax by taking a small UFPLS withdrawal (say £1000) and then wait for your tax code to be updated by HMRC.

Just a question on this point: I assume this is the "month 1 problem", which I was reading about here? They seems to imply there is a difference between UFPLS draw down and simply taking regular payments - but I'm not sure. 

The first access to the 75% element of the pension will be subject to LM1.   It doesn't matter if you are monthly, half yearly, yearly or ad-hoc.  

The only difference is that monthly will correct itself over the remainder of the tax year as by month two, the correct tax code will be in place.

You've got more confidence in HMRC than I have.

PAYE generally works consistently as its primarily automated.  It's the human side of HMRC that tends to let us down.