Avoiding emergency tax when taking first income from SIPP

Pat38493

molerat said:

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.

I agree - in fact the way I interpret this is that it just means that the change to a cumulative tax code will happen more quickly than previously and “automatically”.  It does not say that providers can use a cumulative tax code on the first ever payment from a new pension income stream.

NoMore

I guess most of the overpayments to HMRC are due to one off large withdrawals, which this change doesn't help ?

It presumably helps the regular consistent withdrawals, but only by getting them on the correct tax code quicker ? which would have happened anyway within a month or so ?

If the above is true (I confess not to fully understand the system) then its not really helping at all ?

artyboy

NoMore said:

I guess most of the overpayments to HMRC are due to one off large withdrawals, which this change doesn't help ?

It presumably helps the regular consistent withdrawals, but only by getting them on the correct tax code quicker ? which would have happened anyway within a month or so ?

If the above is true (I confess not to fully understand the system) then it's not really helping at all ?

Unless you can somehow tell HMRC that you
intend to take £50k of pension in May, will have no other taxable income during the tax year, and get a tax code that ensures you pay no more than the equivalent of basic rate tax on the amount over your personal allowance... then yes, it doesn't fix anything really...

Dazed_and_C0nfused

NoMore said:

I guess most of the overpayments to HMRC are due to one off large withdrawals, which this change doesn't help ?

It presumably helps the regular consistent withdrawals, but only by getting them on the correct tax code quicker ? which would have happened anyway within a month or so ?

If the above is true (I confess not to fully understand the system) then its not really helping at all ?

I agree, I'm not really seeing how this helps a lot of people.

But maybe HMRC see different issues than what gets discussed on here 🤔

NoMore

Just to be clear, is there a difference and therefore a possible way this does help between:

1) A single large taxable pension withdrawal (not in Month 12) with no other income

and

2) A single large taxable pension withdrawal (not in Month 12) with other regular monthly PAYE income

Does it work for 2 above ? Again I don't fully understand the system but when I get large bonus in July, the tax works fine with my salary. Which is same/similar to the second situation.

Dazed_and_C0nfused

NoMore said:

Just to be clear, is there a difference and therefore a possible way this does help between:

1) A single large taxable pension withdrawal (not in Month 12) with no other income

and

2) A single large taxable pension withdrawal (not in Month 12) with other regular monthly PAYE income

Does it work for 2 above ? Again I don't fully understand the system but when I get large bonus in July, the tax works fine with my salary. Which is same/similar to the second situation.

What was in the article doesn't help with 1 because there is only a single pension payment.

And it doesn't help with 2 for the same reason.

But in theory 2 can be resolved via the payroll if the regular monthly PAYE income.

Qyburn

I think the cumulative codes only "accumulate" with one payroll system. So that works for the July bonus which is possibly over-taxed but can then be sorted out in subsequent monthly payroll runs, as the bonus forms part of the year-to-date cumulative figure.

I can't see how if would work with separate payrolls unless they do something really creative. Say you have monthly income taxed on PAYE on a normal cumulative code. How is that going to pay back an over-taxed lump sum from a completely different provider? For a start HMRC don't even know it was over-taxed until the end of the FY.

NoMore

I figured as much Qyburn, with the bonus coming in the same PAYE income it works, doing similar across multiple incomes doesn't.

zagfles

Qyburn said:

I think the cumulative codes only "accumulate" with one payroll system. So that works for the July bonus which is possibly over-taxed but can then be sorted out in subsequent monthly payroll runs, as the bonus forms part of the year-to-date cumulative figure.

I can't see how if would work with separate payrolls unless they do something really creative. Say you have monthly income taxed on PAYE on a normal cumulative code. How is that going to pay back an over-taxed lump sum from a completely different provider? For a start HMRC don't even know it was over-taxed until the end of the FY.

If you've got a monthly income and also a pension starts being paid they'd normally use a code like BR for the pension so it all gets taxed at the basic rate, or if the monthly income uses up the basic rate band then D0 for the pension so it gets taxed at higher rate.

Gets a bit more complicated if they think the pension will take you across a tax band, then they apply an "adjustment to tax rate bands" fiddle factor. See PAYE13100 - Coding: coding: general principles: intermediate and higher rate individuals - HMRC internal manual - GOV.UK for the gory details

Linton

Qyburn said:

I think the cumulative codes only "accumulate" with one payroll system. So that works for the July bonus which is possibly over-taxed but can then be sorted out in subsequent monthly payroll runs, as the bonus forms part of the year-to-date cumulative figure.

I can't see how if would work with separate payrolls unless they do something really creative. Say you have monthly income taxed on PAYE on a normal cumulative code. How is that going to pay back an over-taxed lump sum from a completely different provider? For a start HMRC don't even know it was over-taxed until the end of the FY.

Yes, each payroll is completely separate, even if in the same company.  Any coordination required between multiple payrolls is managed by HMRC using appropriate tax codes chosen to ensure the overall tax taken is correct..