Please sense check my SIPP withdrawal calculation

bownyboy

Hi everyone, 

My wife is taking her first SIPP withdrawal in March 2024 and I’d like a sense check to make sure my calculations are correct. 

- She is over 55
- She has not made any previous withdrawals
- Her only income in this tax year is £6,000 in dividends from our limited company

She wants to withdraw a one-off amount in March 2024 using her personal allowance, plus 25% tax-free, plus marriage allowance (transferred from me as I’ve also only had £6,000 of dividends income this tax year).

So is the calculation simply:

£12,570 (personal allowance) + £4,190 (25% tax free) + £1,260 (marriage allowance) = £18,020

Minus £6,000 (dividends income)

= £12,020?

The plan is to withdraw this in March 2024 so she won’t be hit with extra tax and then deposit it straight back into her ISA.

Thanks!

Dazed_and_C0nfused

If this is her first ever taxable payment how do you propose avoiding the use of the emergency tax code (1257L) on a non cumulative basis on the first payment?

Marriage Allowance doesn't entitle her to any additional allowances, it gives her a £252 reduction in her tax liability.  

Are you able to clarify how much she plans on taking from the SIPP (the taxable amount).

bownyboy

Hi, 

My understanding was that if you withdraw a single amount at the end of the tax year then there is no emergency tax to pay?

Thanks for the clarification on the marriage allowance. 

We're trying to calculate the amount she can withdraw without paying any additional tax. 

Dazed_and_C0nfused

I think your total taxable income figure will be £16,450.

£6,000 dividend + £10,450 pension income

£16,450 less PA £12,570 = £3,880 to be taxed

£1,000 x 0% = £0.00 (dividend nil rate)
£2,880 x 8.75% = £252 (dividend basic rate)

My understanding was that if you withdraw a single amount at the end of the tax year then there is no emergency tax to pay?

Where have you got that understanding from?

Pat38493

bownyboy said:

Hi, 

My understanding was that if you withdraw a single amount at the end of the tax year then there is no emergency tax to pay?

Not really - if you make your only withdrawal in the last month of the tax year, and it's your only income during the whole year, then the amount taxed should I think be correct and will not be wrong.

However if you have other income during the tax year, you would still probably end up paying the wrong tax amount on the pension withdrawal which would need to be somehow corrected.

Dazed_and_C0nfused

Pat38493 said:

bownyboy said:

Hi, 

My understanding was that if you withdraw a single amount at the end of the tax year then there is no emergency tax to pay?

Not really - if you make your only withdrawal in the last month of the tax year, and it's your only income during the whole year, then the amount taxed should I think be correct and will not be wrong.

However if you have other income during the tax year, you would still probably end up paying the wrong tax amount on the pension withdrawal which would need to be somehow corrected.

But the op said this in the first post.

She has not made any previous withdrawals

Pat38493

Dazed_and_C0nfused said:

Pat38493 said:

bownyboy said:

Hi, 

My understanding was that if you withdraw a single amount at the end of the tax year then there is no emergency tax to pay?

Not really - if you make your only withdrawal in the last month of the tax year, and it's your only income during the whole year, then the amount taxed should I think be correct and will not be wrong.

However if you have other income during the tax year, you would still probably end up paying the wrong tax amount on the pension withdrawal which would need to be somehow corrected.

But the op said this in the first post.

She has not made any previous withdrawals

So this means what then?  This means the emergency tax code would assume no personal allowance available?

Dazed_and_C0nfused

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

bownyboy said:

Hi, 

My understanding was that if you withdraw a single amount at the end of the tax year then there is no emergency tax to pay?

Not really - if you make your only withdrawal in the last month of the tax year, and it's your only income during the whole year, then the amount taxed should I think be correct and will not be wrong.

However if you have other income during the tax year, you would still probably end up paying the wrong tax amount on the pension withdrawal which would need to be somehow corrected.

But the op said this in the first post.

She has not made any previous withdrawals

So this means what then?  This means the emergency tax code would assume no personal allowance available?

No, the emergency tax code is 1257L.

But most pension payers are instructed to operate this on a non cumulative basis for the first taxable payment

Pat38493

Dazed_and_C0nfused said:

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

bownyboy said:

Hi, 

My understanding was that if you withdraw a single amount at the end of the tax year then there is no emergency tax to pay?

Not really - if you make your only withdrawal in the last month of the tax year, and it's your only income during the whole year, then the amount taxed should I think be correct and will not be wrong.

However if you have other income during the tax year, you would still probably end up paying the wrong tax amount on the pension withdrawal which would need to be somehow corrected.

But the op said this in the first post.

She has not made any previous withdrawals

So this means what then?  This means the emergency tax code would assume no personal allowance available?

No, the emergency tax code is 1257L.

But most pension payers are instructed to operate this on a non cumulative basis for the first taxable payment

OK so then this means you would pay too much tax even if it's the last month of the year.

The workaround I guess would be to take a withdrawal of a small amount some months earlier, and then by the time you make the last withdrawal, HMRC should have given an correct tax code to the pension provider?

af1963

Are you aiming to take as much as possible from the SIPP without paying any tax on either the SIPP payment or the dividends?

If so, her total taxable income needs to stay below (12570+1260) = 13830.  The first 1000 of dividend income isn't taxed so she has 5000 of taxed dividend income, and has (13830-5000) = 8830 of allowance to cover taxable income from the SIPP; plus she can take the associated tax free cash of 2943.  Total she can take from SIPP is then 11773.

If she took the full (increased) personal allowance from the SIPP she could take 13830 plus 4610 tax free cash =18440. Then £5000 of the dividends would be taxed at the dividend rate of 8.75% so she'd pay 437 in tax. That might be worth doing as it effectively gets an extra 6666 out of the SIPP at a cost of 437 in tax - about 6% of the extra payment.  Withdrawing the money later from the SIPP, after other pensions start, could be taxed at 15%.

Dazed_and_C0nfused

af1963 said:

Are you aiming to take as much as possible from the SIPP without paying any tax on either the SIPP payment or the dividends?

If so, her total taxable income needs to stay below (12570+1260) = 13830.  The first 1000 of dividend income isn't taxed so she has 5000 of taxed dividend income, and has (13830-5000) = 8830 of allowance to cover taxable income from the SIPP; plus she can take the associated tax free cash of 2943.  Total she can take from SIPP is then 11773.

If she took the full (increased) personal allowance from the SIPP she could take 13830 plus 4610 tax free cash =18440. Then £5000 of the dividends would be taxed at the dividend rate of 8.75% so she'd pay 437 in tax. That might be worth doing as it effectively gets an extra 6666 out of the SIPP at a cost of 437 in tax - about 6% of the extra payment.  Withdrawing the money later from the SIPP, after other pensions start, could be taxed at 15%.

You seem to be overlooking the fact that the op cannot have a Personal Allowance greater than £12,570 and gets a tax deduction from being the recipient of Marriage Allowance.