Tax on a one-off withdrawal from drawdown

PharmaGiles

Dazed_and_C0nfused 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.

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.

The code is 700LX. I should probably have clarified that this isn't the first ever withdrawal, just the first this tax year.

BoGoF

And 700LX is a week/month1 code anyway so wouldn't have given £7000 tax free. What does the pension payslip say was operated?

Dazed_and_C0nfused

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 the X means it was to be operated on a non cumulative basis.

So you got 1/12th of 7009 allowance.  And 1/12th of the basic rate band.

How you persuaded HMRC to do that is beyond me though!

You realise you would paid less tax on the emergency tax code!

molerat

PharmaGiles said:

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?

The X suffix means each month is stand alone and uses 1/12th of the tax allowance so only £584.09 of that withdrawal was tax free, £2078 was correctly deducted by the pension provider.   You will need to reclaim any tax deducted https://www.gov.uk/claim-tax-refund.

Even if the code was applied on a cumulative basis, without the X suffix, only £5840.90 would have been available tax free in January so a reclaim, or wait for the natural process to refund, would have been needed for the rest.

PharmaGiles

BoGoF said:

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.

I may have misled by implying it was the first time ever I had taken anything from this pension. It was just the first time in this tax year.

BoGoF

PharmaGiles said:

BoGoF said:

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.

I may have misled by implying it was the first time ever I had taken anything from this pension. It was just the first time in this tax year.

That explains it but has since been explained it was a non-cumulative code that hasn't helped you one bit. That said the tax looks a bit high for the amount paid and the code operated - are you subject to Scottish rate of tax by any chance?

PharmaGiles

molerat said:

PharmaGiles said:

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?

The X suffix means each month is stand alone and uses 1/12th of the tax allowance so only £584.09 of that withdrawal was tax free, £2078 was correctly deducted by the pension provider.   You will need to reclaim any tax deducted.

Thank you, that does explain it then, although I don't understand why they used the X suffix when I had already told them that £7k was the full amount I was going to take for the year. It doesn't appear that the system works well with ad-hoc withdrawals. It's just as well I 'm not in desperate need of the cash. I have already sent a request for repayment.

molerat

BoGoF said:

That explains it but has since been explained it was a non-cumulative code that hasn't helped you one bit. That said the tax looks a bit high for the amount paid and the code operated - are you subject to Scottish rate of tax by any chance?

Tax on £7353 with a 700LX code would be £2285.71 in Scotland and £2078.86 elsewhere.  And the code would have an S prefix.

PharmaGiles

BoGoF said:

And 700LX is a week/month1 code anyway so wouldn't have given £7000 tax free. What does the pension payslip say was operated?

Aegon haven't sent me a payslip, just an email with the gross and net amounts. I'm not in Scotland but £2078 is the amount they took. It almost appears my trying to pre-empt the situation made things worse!

german_keeper

I started to take £300 per month from a DC pension last April. Strangely the first payment wasn't taxed, I had expected to pay 20%, but the second payment was taxed. I phoned HMRC and the chap explained it was down to a non cumulative code (I didn't know anything about cumulative and non cumulative codes - not bad for an ex HMRC employee!). So he just removed the X from the code and reissued it. I received the overpaid tax back from the pension provider the following month. Obviously a much smaller amount than yours but I don't see why the same principle wouldn't apply.