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Tax on Drawdown

My partner has a small private pension and two small occupational pensions. She has taken the 25% tax free sum from the private pension and a couple of months ago drew down £1k (gross) which led to HMRC sending a tax code of 100T to the provider.

My understanding is that when drawing down a further £5k (gross) in the same tax year the 100T tax code means that 20% tax would be paid on £(5-1)=4k i.e. £4,200 is paid out. This is borne out by online tax calculators.

The provider is a very large UK insurance company and has only paid out £3,662. A little work with the online calculator suggests they have assumed she wants to take £5k every month, and taxed accordingly. The calculator shows £1,338 as the amount that would be taken when £5k is paid monthly.

Several things wrong with this, not least the pot isn't nearly big enough to pay out £5k for even the remaining months of this tax year! We have spoken to three levels of 'help' desk and been stonewalled. This cannot be right surely? I know she can get the tax back in the next tax year but why should HMRC be holding onto £538 that the provider has surely paid out in error - or have I misunderstood?

Thanks

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Comments

  • NoMore
    NoMore Posts: 1,439 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Don't think you have to wait until next tax year, you can just fill in a P55 and get it this year.

    Claim back tax on a flexibly accessed pension overpayment (P55) - GOV.UK (www.gov.uk)
  • Can you avoid the same thing happening year after year when drawing an annual lump sum for the year
  • Albermarle
    Albermarle Posts: 25,936 Forumite
    10,000 Posts Sixth Anniversary Name Dropper
    IEFBR14 said:
    My partner has a small private pension and two small occupational pensions. She has taken the 25% tax free sum from the private pension and a couple of months ago drew down £1k (gross) which led to HMRC sending a tax code of 100T to the provider.

    My understanding is that when drawing down a further £5k (gross) in the same tax year the 100T tax code means that 20% tax would be paid on £(5-1)=4k i.e. £4,200 is paid out. This is borne out by online tax calculators.

    The provider is a very large UK insurance company and has only paid out £3,662. A little work with the online calculator suggests they have assumed she wants to take £5k every month, and taxed accordingly. The calculator shows £1,338 as the amount that would be taken when £5k is paid monthly.

    Several things wrong with this, not least the pot isn't nearly big enough to pay out £5k for even the remaining months of this tax year! We have spoken to three levels of 'help' desk and been stonewalled. This cannot be right surely? I know she can get the tax back in the next tax year but why should HMRC be holding onto £538 that the provider has surely paid out in error - or have I misunderstood?

    Thanks

    The provider can only use the tax code that HMRC issues to them. There is no point keep phoning the provider, if you have a tax issue then HMRC is the place to go.
    suggests they have assumed she wants to take £5k every month, and taxed accordingly.
     Pension income is treated like employment income under PAYE, so it is assumed that the monthly payment will be repeated.
    You can avoid it by taking the lump sum in March ( at the end of the tax year) although reclaiming the extra tax is quite easy.
  • SVaz
    SVaz Posts: 371 Forumite
    100 Posts First Anniversary
    I think you can take a large lump sum in March to cover all/ whatever personal allowance you have left.
    You can also update your personal tax account online with the amount of income you intend to have in that tax year. 
    She may have been better using UFPLS payments ( tax wise) but as she’s already taken her full TFLS, it’s irrelevant. 
  • xylophone
    xylophone Posts: 45,426 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    https://www.gov.uk/tax-codes/what-your-tax-code-means


    https://adviser.royallondon.com/technical-central/pensions/case-studies/emergency-rate-income-tax/#:~:text=Unless a pension provider holds,first withdrawal from their pension.

    Is the individual planning on taking all of their pension savings from the plan?

    Yes, they are taking the whole fund. Does the individual have another source of income in this tax year? If no, use form P50Z. If yes, use form P53Z

    No, the individual is only taking part of the fund. Does the individual plan on taking more money from the plan this tax year? If no, use form P55. If yes, HMRC will confirm the tax code.

    You will note from this that individuals who intend to make further lump sum withdrawals and/or take income in the current tax year are expected to wait until HMRC issue the revised tax code. This is why there is no form which covers this situation.


  • dunstonh
    dunstonh Posts: 118,554 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Several things wrong with this, not least the pot isn't nearly big enough to pay out £5k for even the remaining months of this tax year! 
    It doesn't matter.  Its HMRC that set the PAYE rules not the pension provider.    PAYE has always worked this way.

     We have spoken to three levels of 'help' desk and been stonewalled. This cannot be right surely?
    It is right.

     I know she can get the tax back in the next tax year but why should HMRC be holding onto £538 that the provider has surely paid out in error - or have I misunderstood?
    There is no error.   Taxation is correct for the method.   Even though it is not correct for the individual.  Options are:
    1 - complete the appropriate P form (P55 likely here) via Govt Gateway or paper and get the tax back in about 3 weeks (online) or 3 months (paper)
    2 - do another withdrawal in payroll month 12 (so later in March 24)
    3 - wait until HMRC get round to it (wait about 2-3 years)





    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.

  • The provider can only use the tax code that HMRC issues to them. There is no point keep phoning the provider, if you have a tax issue then HMRC is the place to go.
    suggests they have assumed she wants to take £5k every month, and taxed accordingly.
     Pension income is treated like employment income under PAYE, so it is assumed that the monthly payment will be repeated.
    You can avoid it by taking the lump sum in March ( at the end of the tax year) although reclaiming the extra tax is quite easy.

    We are not disputing the tax code. The dispute is because my partner has applied for a single payment but the provider has applied tax on the assumption that £5k will be taken every month.

    Waiting until March would not resolve this problem in this case, because they would take £1,338 as tax in that month as well.

    My own SIPP with a different provider is not yet in drawdown. I phoned them to ask what would happen if, some time after I took my TFLS, I wanted to take a single payment. They said it would not be taxed on the assumption that I would be taking that payment amount repeatedly, every month. My partner's provider is one of the very largest companies I don't understand why they cannot handle single payments properly.

    When our contact in the company phoned today he admitted that the amount of tax didn't look right and he couldn't explain it. In practice, the quickest way to get the tax back will be to fill in a P55 online and that's what we're going to do, but I wonder how many pensioners are being treated in a similar manner and paying way too much tax on their modest drawdowns?


  • NoMore
    NoMore Posts: 1,439 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Its a known problem with the PAYE system and HMRC so far are refusing to change the system. Its basically why the P55 form was created in the first place.

    Pension savers slapped with £1BILLION in emergency tax on withdrawals | This is Money
  • IEFBR14 said:
    My partner has a small private pension and two small occupational pensions. She has taken the 25% tax free sum from the private pension and a couple of months ago drew down £1k (gross) which led to HMRC sending a tax code of 100T to the provider.

    Do you know if the 100T tax code is because those are the only unused tax code allowances she has available?

    If not the most likely alternative is that allowances of 1000 have been allocated to this pension because of the initial (taxable) withdrawal.

    My understanding is that when drawing down a further £5k (gross) in the same tax year the 100T tax code means that 20% tax would be paid on £(5-1)=4k i.e. £4,200 is paid out. This is borne out by online tax calculators.
    That is unlikely to be the correct tax figure given £1,000 has already been taken, presumably without any tax deduction.  A lot will depend on whether the tax code was issued on a cumulative or non cumulative basis.

    The provider is a very large UK insurance company and has only paid out £3,662. A little work with the online calculator suggests they have assumed she wants to take £5k every month, and taxed accordingly. The calculator shows £1,338 as the amount that would be taken when £5k is paid monthly.
    The provider doesn't make any assumptions.  They will normally calculate tax on the first payment using the emergency tax code (1257L) on a non cumulative basis (as per general HMRC instructions). 

    And once a replacement tax code has been issued they will deduct, or refund, tax based on that new tax code.  A key factor here is whether the tax code was issued on a cumulative or non cumulative basis.

    Several things wrong with this, not least the pot isn't nearly big enough to pay out £5k for even the remaining months of this tax year! We have spoken to three levels of 'help' desk and been stonewalled. This cannot be right surely? I know she can get the tax back in the next tax year but why should HMRC be holding onto £538 that the provider has surely paid out in error - or have I misunderstood?
    Yes you seem to have, in several areas. 

    Why do you think the provider has made a mistake?  Have you calculated the tax due under the PAYE system?  

    PAYE tax on pension income is no different to PAYE on earnings.


  • Linton
    Linton Posts: 17,925 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    The provider did not mistakenly assume the payment would be made every month. It is the nature of the PAYE system that any one-off payment except the one in the last month of the tax year could result in excess tax. The same could apply if you had received a large bonus whilst employed. The situation is normally resolved in subsequent payments, if there are any

    The reason is that for the calculation of PAYE you accrue your tax allowance and tax bands at 1/12th of the total each month. So a large payment early in the year could exhaust your accrued allowances putting you temporarily in a higher tax band. This problem is more acute for the first ever payment since no allowances would have been accrued from previous months.

    The basic problem is that PAYE is designed to work very well for people receiving a regular wage. When drawdown came in the cost of implementing and running a second completely new tax system could not possibly be justified.
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