Taking first taxable lump sum from SIPP

Havent_got_a_clue

Hi

we plan to withdraw £50000 from a SIPP in April 2024. This will be the only withdrawal in this tax year and no other income. The tax free element has already been received. 

The HL emergency tax calculator says that the tax deduction will be £20878.

Can anyone please advise how accurate this is? HL say the tax code used initially is always 1257L/ m1.

We do not want to take the money in instalments. Is there a better approach which enables us to receive the pension payment in the first few months of the financial year? 

I read that HMRC have been taking exceptionally long time to settle overpayment claims? Does anyone have any recent experience? 

Thanks in advance

On-the-coast

You say April... do you mean April 6th onwards?
one way of getting things sorted out quicker would be if the payment is received at the end of the current tax year (by April 5th) - although for that to be beneficial to you, you'd need to think about how much taxable income you expect to receive in this tax year versus the next tax year...

xylophone

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

Under PAYE where income tax has been overpaid it will normally be recovered through an adjustment to the tax code for future income payments.

In the case of a pension, HMRC will issue a revised tax code for the provider to apply to future payments.

However, where an individual is taking their pension fund as a lump sum, it is possible that they may not have any ongoing income against which the additional tax can be offset. In this case the individual has two options:

1. They can wait until the end of the tax year. A tax refund will be created as a result of the information submitted in their tax return OR
2. They can reclaim the overpaid tax from HMRC during the tax year using the appropriate claim form. For an individual where the overpayment is substantial this is likely to be the preferred route.

The P55 appears to fit the situation you describe?

https://www.gov.uk/guidance/claim-back-tax-on-a-flexibly-accessed-pension-overpayment-p55

Havent_got_a_clue

Yes it will in next tax year 24/25. First year of retirement and trying to be tax efficient going forward. 

Thank you 

Janie2008

I've heard you can take a small initial amount, £1000, and then your tax code will be adjusted. Not tried it myself but I'm wondering if you could take that now or next April and your tax code would then be corrected.

molerat

£20878 is correct for £50K on a 1257LM1 code.  The only way to limit the tax take at point of payment would be to take £1048 or less after April 6th 2024 and get a code issued leaving the remainder until after March 6th 2025.

You could take a very small payment this tax year, not sure what HL's minimum is to minimise any tax underpayment, to get a code issued but you would still not be able to withdraw the remainder until March 2025.

So if you want the money early on in the tax year you would need to do a tax re claim.

Havent_got_a_clue

I agree, the P55 is the way to go. Thanks Xylophone.

Thanks Molerat for confirming the numbers and also my suspicion that we will just have to take the hit and hope there is not too long a delay when claiming.

Just wondering what the restriction is with having to wait until March 2025 if we took a minimal amount in March 24? I understand that the minimal payment would generate the correct tax code but don’t understand why we couldn’t withdraw until March 25? Unless you mean for the purpose of avoiding the big tax deduction?

Thanks also to Janie- I think this is what Molerat is referring to but I also think it’s the month 1 that it corrects, which doesn’t make much difference to us as we are withdrawing in month 1. Unless I’ve completely misunderstood it? 

Will we have to go through this the following year? 

Janie2008

molerat said:

£20878 is correct for £50K on a 1257LM1 code.  The only way to limit the tax take at point of payment would be to take £1048 or less after April 6th 2024 and get a code issued leaving the remainder until after March 6th 2025.

You could take a very small payment this tax year, not sure what HL's minimum is to minimise any tax underpayment, to get a code issued but you would still not be able to withdraw the remainder until March 2025.

So if you want the money early on in the tax year you would need to do a tax re claim.

Can you explain this a bit more please. Why is it after March 6th and why is it not until 2025 that you can withdraw even of you pay a small amount now? Just thinking of the best way to withdraw money from my Sipp in the future as a non tax payer to minimise reclaiming tax. Thanks.

Havent_got_a_clue

Sorry Molerat, I read your post again and see that it’s the only way to avoid tax is exactly what you were referring to.

I thought I’d missed some rule that would impact on all our plans 🙈

molerat

Janie2008 said:

molerat said:

£20878 is correct for £50K on a 1257LM1 code.  The only way to limit the tax take at point of payment would be to take £1048 or less after April 6th 2024 and get a code issued leaving the remainder until after March 6th 2025.

You could take a very small payment this tax year, not sure what HL's minimum is to minimise any tax underpayment, to get a code issued but you would still not be able to withdraw the remainder until March 2025.

So if you want the money early on in the tax year you would need to do a tax re claim.

Can you explain this a bit more please. Why is it after March 6th and why is it not until 2025 that you can withdraw even of you pay a small amount now? Just thinking of the best way to withdraw money from my Sipp in the future as a non tax payer to minimise reclaiming tax. Thanks.

That was in response to the op's particular scenario of wanting to withdraw in the 24-25 tax year. In March you have the whole of your tax allowance for the year available if you have no other income, any month previous you only have x/12ths available.  Taking a small sum this year would trigger a tax code now but, in op's case, would only be of use in the 24-25 tax year.

molerat

Havent_got_a_clue said:

Will we have to go through this the following year? 

Unfortunately to some extent yes.  The only way to avoid reclaiming the tax with a large sum withdrawal is to take it in March.  But in future years the tax code will already be in place.