Underpayment 24/25 pushing me into the 40% band in 25/26

Tommyrot

I've been drawing from my SIPP at a level keeping me within the 20% tax band. Last month I decided to draw a large lump sum and pass the money on to my daughters. I knew this would attract tax at 40% but better to let them have the money now than after I die, whenever that may be.
 
HMRC are not taking the additional tax due this year. They are rolling it forward into 25/26 as an underpayment and adjusting the 25/26 tax code to collect the tax during that year. The reason is that I have a small occupational pension that is registered as my primary pension which is too small to cover the underpayment. My larger SIPP can cover the tax due but is coded  BR and is not available to them in 24/25 to draw the tax due. 

So what's the problem? In 25/26 I will need to increase the amount I draw from my SIPP to keep the same net income as in previous years. This will drive me into paying 40% tax on the money being collected to clear the underpayment. That seems unfair.

I have spoken with HMRC and been told that's the way the system works and nothing can be done to draw unpaid the tax directly out  out of my SIPP. It will have to be paid from taxed income. 

Going forward HMRC have agreed to register my SIPP as the primary pension so the same issue should not arise in future years.

It's not a crisis, it's just frustrating. If anyone is aware of how to arrive at a better outcome please let me know. 

I hope this post helps others to avoid the pitfall. 
 

eskbanker

Your tax liabilities are driven by when taxable income is actually received rather than when you pay the resultant tax, so the SIPP withdrawal counts as 2024/25 income even if the tax itself isn't paid until 2025/26, and therefore doesn't affect your actual 2025/26 gross taxable income, i.e. you'll still ultimately pay the same amount of tax on your 2025/26 income as you would have done anyway, even if you're also paying back some of that for 2024/25 at the same time.

Dazed_and_C0nfused

Tommyrot said:

I've been drawing from my SIPP at a level keeping me within the 20% tax band. Last month I decided to draw a large lump sum and pass the money on to my daughters. I knew this would attract tax at 40% but better to let them have the money now than after I die, whenever that may be.
 
HMRC are not taking the additional tax due this year. They are rolling it forward into 25/26 as an underpayment and adjusting the 25/26 tax code to collect the tax during that year. The reason is that I have a small occupational pension that is registered as my primary pension which is too small to cover the underpayment. My larger SIPP can cover the tax due but is coded  BR and is not available to them in 24/25 to draw the tax due. 

So what's the problem? In 25/26 I will need to increase the amount I draw from my SIPP to keep the same net income as in previous years. This will drive me into paying 40% tax on the money being collected to clear the underpayment. That seems unfair.

I have spoken with HMRC and been told that's the way the system works and nothing can be done to draw unpaid the tax directly out  out of my SIPP. It will have to be paid from taxed income. 

Going forward HMRC have agreed to register my SIPP as the primary pension so the same issue should not arise in future years.

It's not a crisis, it's just frustrating. If anyone is aware of how to arrive at a better outcome please let me know. 

I hope this post helps others to avoid the pitfall. 
 

You've totally misunderstood how income tax works.

Having an underpayment will not change what tax rates your income is taxed at.

An underpayment is simply an extra amount added to whatever your liability is for a particular year.

For tax code purposes you may find your employer/pension payer has to deduct some 40% tax purely for the purpose of collecting the underpayment but that doesn't mean you will pay higher rate tax when your actual liability is established.