Avoiding emergency tax when taking first income from SIPP

zagfles

Dazed_and_C0nfused said:

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.

What about a BR tax code. There was someone here complaining they'd been way undertaxed because their provider had used a BR code on a withdrawal over £200k. OP would still be overtaxed (ie all at basic rate, no PA) but nowhere near as much as using a normal cumulative code. So could ask HMRC for a BR tax code after first token withdrawal. 

Dazed_and_C0nfused

zagfles said:

Dazed_and_C0nfused said:

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.

What about a BR tax code. There was someone here complaining they'd been way undertaxed because their provider had used a BR code on a withdrawal over £200k. OP would still be overtaxed (ie all at basic rate, no PA) but nowhere near as much as using a normal cumulative code. So could ask HMRC for a BR tax code after first token withdrawal. 

Agree that would result in less tax than 1257L would on the large second payment.

No idea how easy it would be to get a BR tax code though in this situation?

Qyburn

The only way it would be taxed correctly first time is if a cumulative tax code is issued, and the payment taken in Month 12.  That runs the risk, depending on the scheme's responsiveness, of missing the year end and falling into M1 of the next tax year.

That reminds me we both took UFPLSs paid in January (M10). Mine was taxed on month 1 basis which I expected as HMRC had given the code S639LX. But Lady Q's payment was made without any deduction, I've no idea why as I don't know what code she had.

Last year my P55 tax refund took 21 days, submitted 31/1 paid 21/2.

halwyn

Thanks to everyone - so it's P55 for me.  That's fine.  I'll do it online and cross my fingers.  

ColdIron

May be of interest

HMRC to fix £1.4bn pension tax overpayment issue in April

HM Revenue and Customs (HMRC) will move to change its systems so pension withdrawals will no longer be subject to emergency tax codes from April. 

Since pension freedoms was introduced in 2015, individuals withdrawing money from their defined contribution pots have often had to face the scenario of needing to go back to HMRC to claim back tax. 

This was due to emergency tax codes being used for those who are withdrawing from their pots for the first time, rather than the cumulative system that is used for the PAYE system.

Data from pensions consultancy Lane Clark and Peacock (LCP) found that 470,000 claims have been made to the total of £1.4bn in overtaxed pensions since 2015. 

HMRC has now said it will be changing this system from April meaning members should be on the right tax code when they make their first pension withdrawals.

https://citywire.com/new-model-adviser/news/hmrc-to-fix-1-4bn-pension-tax-overpayment-issue-in-april/a2458228

Linton

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.

One further detail.  Once ytou have got the appropriate tax code for your pension you still need to be careful. ...

The way PAYE normally works is that it allocates 1/12 of your tax bands each month accumulating them over the year.  So even with the right tax code you may have to take your taxable lump sum late in the tax year to ensure you have accrued sufficient allowances/tax bands not to be placed in a higher rate band.

The system is the way it is because PAYE is a complex system that works pretty well for the purposes it was designed - regularly paid workers who could have difficultly managing their money to ensure that they had sufficient to pay taxes at the end of the year once all their income was known.  Having a separate different system just to deal with pensions taxable lump sums would have been far too expensive in software development, training etc.

Pat38493

ColdIron said:

May be of interest

HMRC to fix £1.4bn pension tax overpayment issue in April

HM Revenue and Customs (HMRC) will move to change its systems so pension withdrawals will no longer be subject to emergency tax codes from April. 

Since pension freedoms was introduced in 2015, individuals withdrawing money from their defined contribution pots have often had to face the scenario of needing to go back to HMRC to claim back tax. 

This was due to emergency tax codes being used for those who are withdrawing from their pots for the first time, rather than the cumulative system that is used for the PAYE system.

Data from pensions consultancy Lane Clark and Peacock (LCP) found that 470,000 claims have been made to the total of £1.4bn in overtaxed pensions since 2015. 

HMRC has now said it will be changing this system from April meaning members should be on the right tax code when they make their first pension withdrawals.

https://citywire.com/new-model-adviser/news/hmrc-to-fix-1-4bn-pension-tax-overpayment-issue-in-april/a2458228

How exactly are they going to fix it?  (I am not a member of the site linked).

JoeCrystal

Read Pensions schemes newsletter 166 published by HMRC today.

Here is the section regarding this. Interestingly, they also include the number of forms and total of taxes paid back at the bottom of this newsletter. I'm quite surprised at how small the numbers are, to be honest!

Helping customers get on the right pension pay faster

From April 2025 we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset. We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year. There is no need to contact HMRC and once a tax code has been changed we’ll inform customers by letter or digitally if they’ve signed up for paperless in the HMRC app or online.

You do not need to make any changes to your tax coding process as we will automatically change these codes. However, as we’re systematically changing the tax codes for these customers you will receive notices for tax codes that have been automatically adjusted as they happen. As well as benefiting customers who will receive the right pension pay quicker, you may also see a reduction in queries you receive on tax code errors.

This small change is part of our wider commitment towards improving our customer service experience.

Pension flexibility statistics

HMRC can now give more information on the number of tax repayment claim forms processed for pension flexibility payments.

From 1 October 2024 to 31 December 2024, we processed:

• P55 — 8,523 forms
• P53Z — 4,760 forms
• P50Z — 1,329 forms

Total value repaid: £49,514,458

ColdIron

Pat38493 said:

ColdIron said:

May be of interest

HMRC to fix £1.4bn pension tax overpayment issue in April

HM Revenue and Customs (HMRC) will move to change its systems so pension withdrawals will no longer be subject to emergency tax codes from April. 

Since pension freedoms was introduced in 2015, individuals withdrawing money from their defined contribution pots have often had to face the scenario of needing to go back to HMRC to claim back tax. 

This was due to emergency tax codes being used for those who are withdrawing from their pots for the first time, rather than the cumulative system that is used for the PAYE system.

Data from pensions consultancy Lane Clark and Peacock (LCP) found that 470,000 claims have been made to the total of £1.4bn in overtaxed pensions since 2015. 

HMRC has now said it will be changing this system from April meaning members should be on the right tax code when they make their first pension withdrawals.

https://citywire.com/new-model-adviser/news/hmrc-to-fix-1-4bn-pension-tax-overpayment-issue-in-april/a2458228

How exactly are they going to fix it?  (I am not a member of the site linked).

Remainder of the article ...

The post in the latest newsletter reads: ‘From April 2025 we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset. 

‘We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year,’ it added.

HMRC says it will automatically change individual’s codes, with customers being told of the adjustments in due course. 

Steve Webb, a partner at LCP, said: ‘It is great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system. 

‘For too long, hundreds of thousands of people have been overtaxed and had to jump through hoops to claim back their own money.  

‘This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax. The tax system is complex enough as it is, and this change should hopefully reduce the complications which pension savers face when they try to access their hard-earned cash.’

molerat

We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year

It is not going to "fix the problem".  It is purely going to get more customers onto a cumulative code, it can only ensure the correct tax is deducted if a payment is made in M12. They are not going to change the whole system to accommodate large one off pension withdrawals.