Avoiding emergency tax when taking first income from SIPP

halwyn

So the day is close and I will be retiring end of March and will start to take my first taxable income from my SIPP - held with ii.  I have already taken the tax free lump sum and intend to draw £50,270 starting April 2025 to keep within the 20% tax bracket.

ii hold a month 1 emergency tax code for me - so if I take the full £50k in one lump I will be clobbered for tax and will need to reclaim via P55.  That's an option - but I saw somwehere that taking a smaller amount (e.g. £1,000) as an intial payment will trigger a normal tax code.  If I wait for that to be lodged at ii and then take £49k for example, will that mean I am just taxed the 20% and will not need a P55?  Has anyone managed that goal?

I would prefer the full payment early in the tax year to have the most flexibility with how I use it.  I am 60 and intend to repeat the same process until 67 when the state pension kicks in.

Dazed_and_C0nfused

halwyn said:

So the day is close and I will be retiring end of March and will start to take my first taxable income from my SIPP - held with ii.  I have already taken the tax free lump sum and intend to draw £50,270 starting April 2025 to keep within the 20% tax bracket.

ii hold a month 1 emergency tax code for me - so if I take the full £50k in one lump I will be clobbered for tax and will need to reclaim via P55.  That's an option - but I saw somwehere that taking a smaller amount (e.g. £1,000) as an intial payment will trigger a normal tax code.  If I wait for that to be lodged at ii and then take £49k for example, will that mean I am just taxed the 20% and will not need a P55?  Has anyone managed that goal?

I would prefer the full payment early in the tax year to have the most flexibility with how I use it.  I am 60 and intend to repeat the same process until 67 when the state pension kicks in.

If you have the emergency code (1257L) on a cumulative basis in place then taking £50,270 by month 2 is equivalent of ~£300k/year.

So well into additional rate tax.

Can you take money monthly or is that really not an option?

molerat

The only way to avoid being "overtaxed" in the year, provided you have a cumulative code, is to take a final withdrawal in M12, March.  That means any over or underpaid tax for the year, in accordance to the code in use, will be reconciled in that final month.

Interesting that you say they hold an emergency M1 code for you, is that showing on your personal tax account ?  Or I wonder if they do that automatically even if you have not taken a taxable amount ?

QrizB

If you're planning to retire at the end of March, can you take a small first drawing *this* tax year? Maybe as soon as February?HMRC will issue a tax code and you can take your £50k in April as planned.

What would this cost you in tax, and would that cost be bearable?

Ignore my wittering. See molerat above (and below).

molerat

QrizB said:

If you're planning to retire at the end of March, can you take a small first drawing *this* tax year? Maybe as soon as February?HMRC will issue a tax code and you can take your £50k in April as planned.

What would this cost you in tax, and would that cost be bearable?

If a large amount is taken that early in the tax year then a big tax deduction would be made whatever code is in use,  The only way to avoid that is to pace the withdrawals over the year or to take a final dip in March to reconcile the year.

Lowtrawler

I'm also with ii and intend to take withdrawals twice a year, in September and March. That should help avoid excess tax being paid. My first withdrawal after entering drawdown will be made in April for a relatively small amount as that will trigger ii being given an accurate tax code to be used by HMRC.

Dazed_and_C0nfused

Lowtrawler said:

I'm also with ii and intend to take withdrawals twice a year, in September and March. That should help avoid excess tax being paid. My first withdrawal after entering drawdown will be made in April for a relatively small amount as that will trigger ii being given an accurate tax code to be used by HMRC.

To be used by ii.  Or do you work for HMRC 🤔

halwyn

Thanks for all the input and apologies that I did not reply - I've been working away.  The tax code ii hold for me is indeed 1257L on a Month 1 basis.  I am with Longtrader above - hoping that taking out £1,000 in April will result in a new tax code being issued by HMRC to ii that will enable me to take out the remaining £49k in one lump and just pay the 20% tax due.  That's still the plan - and I will wait until I can see a correct tax code on the ii platform.  it seems that it may work but I'd hoped someone had actually done that and had the t-shirt.  Worst case - P55 time after the second payment.  I can live with that if necessary but seems a really daft system to me.

Dazed_and_C0nfused

halwyn said:

Thanks for all the input and apologies that I did not reply - I've been working away.  The tax code ii hold for me is indeed 1257L on a Month 1 basis.  I am with Longtrader above - hoping that taking out £1,000 in April will result in a new tax code being issued by HMRC to ii that will enable me to take out the remaining £49k in one lump and just pay the 20% tax due.  That's still the plan - and I will wait until I can see a correct tax code on the ii platform.  it seems that it may work but I'd hoped someone had actually done that and had the t-shirt.  Worst case - P55 time after the second payment.  I can live with that if necessary but seems a really daft system to me.

If you take £50k in taxable income by month 2 of the tax year, assuming your pension payer operates a monthly payroll process (which most pension payers seem to) then the only way to avoid tax would be to have tax code 30000L 😳

This is how PAYE has worked for about 80 years now and is no different to what would happen to someone earning at the rate of £300k/year two months into the tax year.

davethebb

My partner started her withdrawal from the small II SIPP last year, along with a pension from her previous employer. II automatically applied for an emergency tax code, so we telephoned HMRC to explain the situation, and they split the tax code between II and her previous employer. This resolved the problem immediately. Both pension withdrawals were small and below the taxable limits.

MK62

halwyn said:

Thanks for all the input and apologies that I did not reply - I've been working away.  The tax code ii hold for me is indeed 1257L on a Month 1 basis.  I am with Longtrader above - hoping that taking out £1,000 in April will result in a new tax code being issued by HMRC to ii that will enable me to take out the remaining £49k in one lump and just pay the 20% tax due.  That's still the plan - and I will wait until I can see a correct tax code on the ii platform.  it seems that it may work but I'd hoped someone had actually done that and had the t-shirt.  Worst case - P55 time after the second payment.  I can live with that if necessary but seems a really daft system to me.

Unfortunately, that's the way it is......HMRC haven't really adapted PAYE to cater for the pension freedoms introduced in 2016.......specifically for single annual pension withdrawals, especially in the early part of the tax year. That said, the P55 claim isn't too onerous, but it does mean it will cost you lost interest while HMRC processes your P55 claim.....and that's been getting steadily slower over the past few years. This tax year, it was c.9 weeks.....so cost me around £50 in lost interest.......not life changing, granted, but a bit annoying none-the-less.......perhaps it's another "stealth tax".......