Emergency tax rate on lump-sum.

chevinhawk

I've been looking at drawing down a lump sump from my SIPP, and have been looking at how much tax I'm likely to pay at the time of withdrawal.  I was reckoning on receiving either 25% tax free/75% taxable, or at worst having to pay tax initially on 100%.  However, the emergency tax rates that my provider's (Hargreaves Lansdown) calculator shows indicates a lot more than that.  So, for instance, they reckon that on a on a 25k lump sum (with 25% tax-free) it's £6816.  Yet 75% of 25k is £18750, and 20% of that is £3750. Even if paying on the full sum, that's surely 'only' £5000.  I'm obviously missing something, but what please?

molerat

Until the provider has a code provided by HMRC they must tax at 1257LM1, emergency tax, which means after the 25% tax free amount a further £1048 is tax free and the remainder taxed accordingly, £3142 at 20%, £7287 at 40% and the rest at 45%.  You can reclaim the excess tax or there are ways of minimising the tax deducted.

chevinhawk

Thank you.  Is that because of the Month1 rule?  I wasn't sure how it worked, but looking at those figures, it seems it's assuming it's the first of 12 monthly payments, even though it's at the back end of the year? Or something similar?

molerat

Or something similar?

Pretty much, PAYE never assumes anything though,

dunstonh

 it seems it's assuming it's the first of 12 monthly payments, even though it's at the back end of the year? Or something similar?

Did you take this lump in month 11 or month 12 of the payroll period?

Sarahspangles

chevinhawk said:

I've been looking at drawing down a lump sump from my SIPP, and have been looking at how much tax I'm likely to pay at the time of withdrawal.  I was reckoning on receiving either 25% tax free/75% taxable, or at worst having to pay tax initially on 100%.  However, the emergency tax rates that my provider's (Hargreaves Lansdown) calculator shows indicates a lot more than that.  So, for instance, they reckon that on a on a 25k lump sum (with 25% tax-free) it's £6816.  Yet 75% of 25k is £18750, and 20% of that is £3750. Even if paying on the full sum, that's surely 'only' £5000.  I'm obviously missing something, but what please?

It’s too late now for this year, but after seeing a few posts from people who’ve paid too much tax next year I will be taking a small UFPLS a couple of months before my main withdrawal. The first will trigger issue of a tax code, and I won’t be taxed if the taxable element is 1/12 of the personal allowance, or below. 

Notepad_Phil

Sarahspangles said:

chevinhawk said:

I've been looking at drawing down a lump sump from my SIPP, and have been looking at how much tax I'm likely to pay at the time of withdrawal.  I was reckoning on receiving either 25% tax free/75% taxable, or at worst having to pay tax initially on 100%.  However, the emergency tax rates that my provider's (Hargreaves Lansdown) calculator shows indicates a lot more than that.  So, for instance, they reckon that on a on a 25k lump sum (with 25% tax-free) it's £6816.  Yet 75% of 25k is £18750, and 20% of that is £3750. Even if paying on the full sum, that's surely 'only' £5000.  I'm obviously missing something, but what please?

It’s too late now for this year, but after seeing a few posts from people who’ve paid too much tax next year I will be taking a small UFPLS a couple of months before my main withdrawal. The first will trigger issue of a tax code, and I won’t be taxed if the taxable element is 1/12 of the personal allowance, or below. 

You may already be aware, but just in case, you'll probably also need to take the main withdrawal in month 12 of the tax-year year (i.e. after March 6th) so that you've got the full benefit of your tax code. Otherwise you'll still pay too much tax - easiest way then would probably be to do a final small withdrawal in month 12 which will automatically pay back any overpaid tax over the year.

Sarahspangles

Notepad_Phil said:

Sarahspangles said:

chevinhawk said:

I've been looking at drawing down a lump sump from my SIPP, and have been looking at how much tax I'm likely to pay at the time of withdrawal.  I was reckoning on receiving either 25% tax free/75% taxable, or at worst having to pay tax initially on 100%.  However, the emergency tax rates that my provider's (Hargreaves Lansdown) calculator shows indicates a lot more than that.  So, for instance, they reckon that on a on a 25k lump sum (with 25% tax-free) it's £6816.  Yet 75% of 25k is £18750, and 20% of that is £3750. Even if paying on the full sum, that's surely 'only' £5000.  I'm obviously missing something, but what please?

It’s too late now for this year, but after seeing a few posts from people who’ve paid too much tax next year I will be taking a small UFPLS a couple of months before my main withdrawal. The first will trigger issue of a tax code, and I won’t be taxed if the taxable element is 1/12 of the personal allowance, or below. 

You may already be aware, but just in case, you'll probably also need to take the main withdrawal in month 12 of the tax-year year (i.e. after March 6th) so that you've got the full benefit of your tax code. Otherwise you'll still pay too much tax - easiest way then would probably be to do a final small withdrawal in month 12 which will automatically pay back any overpaid tax over the year.

Yes that’s the plan, I will live off savings initially, take a UFPLS around my birthday, then replenish savings in March with a second UFPLS. The significance of my birthday as the timing, is that other pensions will commence at 60, 65 and 67 and I can use the confirmed payment amounts when I decide how much to take from my SIPP in those years.

chevinhawk

I do

Sarahspangles said:

It’s too late now for this year, but after seeing a few posts from people who’ve paid too much tax next year I will be taking a small UFPLS a couple of months before my main withdrawal. The first will trigger issue of a tax code, and I won’t be taxed if the taxable element is 1/12 of the personal allowance, or below. 

As you say, it's too late now.  If I'm to take a lump sum this year, it looks as if I'll just have to take that temporary hit.  I need to take some out this year, as I have a decent amount of personal allowance that I can use up from this year, whereas next year my state pension (just kicked in) will chew pretty much all that up.  But what I seem to be hearing is that next year I should take an early small amount and then the rest at the end of the tax year?

Sarahspangles

You can claim online for the overpaid tax.

https://www.gov.uk/guidance/claim-back-tax-on-a-flexibly-accessed-pension-overpayment-p55

I think you will be issued a PAYE notice of coding at the beginning of the year - but someone will correct me if not!

molerat

chevinhawk said:

But what I seem to be hearing is that next year I should take an early small amount and then the rest at the end of the tax year?

That is only for the first year to get a code allocated.  In a full year when you have a code, a numerical code and not BR, you can do pretty much as you like as long as you take a payment in M12 when any excess tax deducted will be refunded as that squares the year up according to the code.