Tax on a one-off withdrawal from drawdown

PharmaGiles

Earlier this month (Feb 2024) I took a small lump sum (a bit over £7k) from my drawdown pension with Aegon, to use up the balance of my personal allowance for this tax year. I also recently bought an annuity which is where the first part of the £12,570 allowance will come from. I also have some bank interest and dividends in the current year, but I expect these to be below the taxable thresholds. I have two tax codes, one for each pension provider, and the one Aegon uses has a tax free part of £7k. I was therefore expecting to pay no tax (or only a tiny bit) on this withdrawal, but instead they took over £2k in income tax. I queried this and was told that I have to take it up with HMRC, so I have now sent a repayment request to them. My question is, what exactly is the point of a tax code if Aegon basically ignored it? How did they come up with that figure? (I asked them, but they just said "HMRC tells us how much to take".) Have I misunderstood something?

MallyGirl

first withdrawal is always done using emergency tax code

molerat

MallyGirl said:

first withdrawal is always done using emergency tax code

OP states there is a tax code in place.

OP, what exact is the tax code on this pension (and on the payment notification from the provider) including any suffix letters ?

A code of 700X / 700M1 would take just over £1900 tax from a £7K taxable withdrawal.

Dazed_and_C0nfused

I suspect this could be a timing issue.

Maybe the code Aegon have now was first issued after the payment was taken?

In which case the emergency code (1257L) would have been used on the first payment (on a non cumulative basis).

Dazed_and_C0nfused

PharmaGiles said:

Earlier this month (Feb 2024) I took a small lump sum (a bit over £7k) from my drawdown pension with Aegon, to use up the balance of my personal allowance for this tax year. I also recently bought an annuity which is where the first part of the £12,570 allowance will come from. I also have some bank interest and dividends in the current year, but I expect these to be below the taxable thresholds. I have two tax codes, one for each pension provider, and the one Aegon uses has a tax free part of £7k. I was therefore expecting to pay no tax (or only a tiny bit) on this withdrawal, but instead they took over £2k in income tax. I queried this and was told that I have to take it up with HMRC, so I have now sent a repayment request to them. My question is, what exactly is the point of a tax code if Aegon basically ignored it? How did they come up with that figure? (I asked them, but they just said "HMRC tells us how much to take".) Have I misunderstood something?

Interest and dividends are either taxable or not i.e. from ISA's.

As you are using up your Personal Allowance with the pension income all your interest and dividends will be taxed.  Some at 0% but there are no separate allowances available for this income, just your Personal Allowance.

You may have the full £5,000 savings starter rate band available for the interest but that depends exactly how much taxable pension or earnings you have in this tax year.

PharmaGiles

Thanks for your input. I should have clarified that for the interest I will be taxed at 0% on some of it. However, I understood that there is a £1000 allowance on top of the personal allowance for basic rate taxpayers, and likewise with dividends (£1000 allowance this year, on top of the personal allowance). I intentionally engineered the situation to use up my personal allowance exactly, which is why I took the drawdown amount that I did. I informed HMRC about that in advance, which is how they came up with the tax code. My question is about how Aegon used the tax code, which I thought was supposed to make sure the correct tax is taken.

BoGoF

PharmaGiles said:

Thanks for your input. I should have clarified that for the interest I will be taxed at 0% on some of it. However, I understood that there is a £1000 allowance on top of the personal allowance for basic rate taxpayers, and likewise with dividends (£1000 allowance this year, on top of the personal allowance). I intentionally engineered the situation to use up my personal allowance exactly, which is why I took the drawdown amount that I did. I informed HMRC about that in advance, which is how they came up with the tax code. My question is about how Aegon used the tax code, which I thought was supposed to make sure the correct tax is taken.

But who was this tax code sent to? With the first withdrawal it's chicken and egg as HMRC aren't aware ofvthe pension source until that first withdrawal was made. They can't issue a code in advance.

PharmaGiles

molerat said:

MallyGirl said:

first withdrawal is always done using emergency tax code

OP states there is a tax code in place.

OP, what exact is the tax code on this pension (and on the payment notification from the provider) including any suffix letters ?

A code of 700X / 700M1 would take just over £1900 tax from a £7K taxable withdrawal.

The tax code is 700LX. Aegon confirmed they had this. They actually took £2078 from a gross figure of £7353. I am just trying to understand why they took any tax when that's the total amount for the tax year, plus just over £5k from my annuity. How does that code lead to that amount of tax?

Dazed_and_C0nfused

PharmaGiles said:

Thanks for your input. I should have clarified that for the interest I will be taxed at 0% on some of it. However, I understood that there is a £1000 allowance on top of the personal allowance for basic rate taxpayers, and likewise with dividends (£1000 allowance this year, on top of the personal allowance). I intentionally engineered the situation to use up my personal allowance exactly, which is why I took the drawdown amount that I did. I informed HMRC about that in advance, which is how they came up with the tax code. My question is about how Aegon used the tax code, which I thought was supposed to make sure the correct tax is taken.

I have never heard of HMRC agreeing to issue a tax code to an employer/pension payer before the income has started 🤔

What tax code was applied to your payment?

700L (or T) or 1257L?

The savings nil rate band (up to £1,000 interest taxed at 0%) can only be used after all your Personal Allowance and any available savings starter rate band has been used.

But the dividend nil rate band (upto £1,000 taxed at 0%) is available whatever level of income you have.

PharmaGiles

BoGoF said:

PharmaGiles said:

Thanks for your input. I should have clarified that for the interest I will be taxed at 0% on some of it. However, I understood that there is a £1000 allowance on top of the personal allowance for basic rate taxpayers, and likewise with dividends (£1000 allowance this year, on top of the personal allowance). I intentionally engineered the situation to use up my personal allowance exactly, which is why I took the drawdown amount that I did. I informed HMRC about that in advance, which is how they came up with the tax code. My question is about how Aegon used the tax code, which I thought was supposed to make sure the correct tax is taken.

But who was this tax code sent to? With the first withdrawal it's chicken and egg as HMRC aren't aware ofvthe pension source until that first withdrawal was made. They can't issue a code in advance.

They did issue this in advance, because I told them in advance, via my online account, how much I was intending to take for the year as a whole. According to the explanation on my HMRC account, a code of 700LX means a tax free amount of £7,000.

BoGoF

PharmaGiles said:

BoGoF said:

PharmaGiles said:

Thanks for your input. I should have clarified that for the interest I will be taxed at 0% on some of it. However, I understood that there is a £1000 allowance on top of the personal allowance for basic rate taxpayers, and likewise with dividends (£1000 allowance this year, on top of the personal allowance). I intentionally engineered the situation to use up my personal allowance exactly, which is why I took the drawdown amount that I did. I informed HMRC about that in advance, which is how they came up with the tax code. My question is about how Aegon used the tax code, which I thought was supposed to make sure the correct tax is taken.

But who was this tax code sent to? With the first withdrawal it's chicken and egg as HMRC aren't aware ofvthe pension source until that first withdrawal was made. They can't issue a code in advance.

They did issue this in advance, because I told them in advance, via my online account, how much I was intending to take for the year as a whole. According to the explanation on my HMRC account, a code of 700LX means a tax free amount of £7,000.

But HMRC wouldn't have had a souce for the pension. They don't have a source until the provider tells them it's started.....which is when you drawdown.