Tax-free SIPP Withdrawal

Steve_s1

Just wanted to share my personal experience.

I recently retired (early) and made my first SIPP withdrawal at the start of this new financial year.

Apart from my pension I have no other income and plan to rely on savings / ISA / premium bonds to supplement this. To help my SIPP to go further I want to minimize the amount of tax I pay, and ideally want to pay no tax. 

Using my personal allowance (£12,570) and 25% tax free allowance, I can take £16,760 per year tax free, via UFPLS. 

Since this was my first ever SIPP withdrawal, I didn't want to take £16,760 in one go, since I understand HMRC would have calculated my tax assuming that I would take this amount each month, meaning I would have paid a big chunk of tax (which I would then need to reclaim). Therefore I took just £1000 initially, meaning no tax due.

Today I received my first SIPP "pay slip" which initially confused me since it showed that I had been paid £750, when I was expecting to get £1000. However a short time later I received £1000 in my bank account, so it seems the "pay slip" was excluding the 25% tax-free portion.

I'll now request the remaining £15,760...which should also be tax free to my understanding.

(Before anyone says anything, I know it's possible to withdraw more than this tax free via FAD, but I want to preserve my 25% tax-free portion since in a few years my income should increase from state pension and a DB pension).

eskbanker

Steve_s1 said:

I'll now request the remaining £15,760...which should also be tax free to my understanding.

Only 25% of it will be tax-free - the other 75% will be taxable income, albeit covered by your personal allowance when looking at the total income across the tax year.  In terms of how much tax will be deducted if you take it all in one go, what tax code has been issued to the provider?

Albermarle

 However a short time later I received £1000 in my bank account, so it seems the "pay slip" was excluding the 25% tax-free portion.

As the 25% is not taxable income it will not appear on a PAYE pay slip.

molerat

Steve_s1 said:
I'll now request the remaining £15,760...which should also be tax free to my understanding.

Provided you wait until March.   Does your on line tax account show the code allocated to this pension ?  If 1257 and you take it this month only £298 of the taxable portion will be tax free, each month you will get a cumulative £1048.26 added to the tax free amount so you need to wait until march to get the remaining £11829.12 tax free.  You can of course take a monthly amount or reclaim the tax paid (which negates your small first dip approach)

Steve_s1

Thanks for the comments all. I have been assigned tax code 1257L.

So it sounds like I could wait say a couple of months then claim another 2 x £1048 tax free. Hmmm....that's a bit of a pain. I had understood that provided my first withdrawal wasn't for a large amount I wouldn't trigger a crazy tax code and I would be able to withdraw the £15,760 tax free in one go. That's my understanding from various YouTube "experts" anyway.

molerat

You need to find some new experts, here seems like a good place for that  

Pension providers operate under PAYE in exactly the same way as an employer.  You get 1/12th of your annual allowance each month, the same as in a job.  You could always take it all bar a small amount with the tax deducted then take that small amount in March and get the tax refunded through that payment.

Julezy101

I'm sure I read on here that if you wait until after March 7th ish you can take the full £16,760 out in one go and not get any issues with going on an emergency tax code and having to claim back?

That's the way I'm planning to do it starting in March 2026.

molerat

Julezy101 said:

I'm sure I read on here that if you wait until after March 7th ish you can take the full £16,760 out in one go and not get any issues with going on an emergency tax code and having to claim back?

That's the way I'm planning to do it starting in March 2026.

No.  If you have not taken anything from the pension previously and do not already have a tax code allocated against it you will still only get £1048 tax free on the first withdrawal whenever you take it.  You would need to take a small withdrawal, below £1397 - £1048 taxable to pay no tax, some time earlier to get a code allocated to take the remainder tax free in March.

Steve_s1

molerat said:

You need to find some new experts, here seems like a good place for that  

Pension providers operate under PAYE in exactly the same way as an employer.  You get 1/12th of your annual allowance each month, the same as in a job.  You could always take it all bar a small amount with the tax deducted then take that small amount in March and get the tax refunded through that payment.

Thanks. Just when I (finally) thought I understood how pensions work, I realize I still don't! 

molerat

Steve_s1 said:

Thanks. Just when I (finally) thought I understood how pensions work, I realize I still don't! 

It's not really pensions though, it is tax

How you could do it

Take £1000 (£750 T) in April, no tax £1000 in your bank

Take £15333.33 (£11500 T) in May, pay £2804.53 tax, £12528.80 in your bank

Take £438.66 (£329 T) in March, get £2804.53 tax refunded, £3243.19 in your bank.

Dazed_and_C0nfused

Since this was my first ever SIPP withdrawal, I didn't want to take £16,760 in one go, since I understand HMRC would have calculated my tax assuming that I would take this amount each month, meaning I would have paid a big chunk of tax (which I would then need to reclaim). Therefore I took just £1000 initially, meaning no tax due.

HMRC don't calculate the tax due, the pension provider does that using the tax code HMRC specify must be for the first payment.

And you don't have to claim a refund, any tax overpaid will be automatically refunded by HMRC in the summer after the end of the tax year the tax was deducted.