retiring early taking pension drawdown

clairbear_3

Linton said:

clairbear_3 said:

thanks I read some horror stories where someone took £12k in one month and the taxman 'assumed' they were taking that every month and taxed accordingly!

The tax man makes no assumptions.  What happens under PAYE  is that each month 1/12 of your tax bands and allowances become available and are accumulated. If you take a large pension withdrawal at the start of the year you will have accumulated insufficient allowances to avoid paying a higher rate of tax.

The same thing can happen with one-off bonuses if you are employed.

PAYE works the way it does to monimise the chances of weekly/monthly paid employees being lumbered with an unepected tax bill at the end of the tax year which then has to be chased bty HMRC.  It does this job very well.  Not so good for drawdown pensioners but the costs of developing a new separate tax system could not possibly be justified.

presumably taking a one off sum of £12K in March would not be a problem

QrizB

clairbear_3 said:

Linton said:

clairbear_3 said:

thanks I read some horror stories where someone took £12k in one month and the taxman 'assumed' they were taking that every month and taxed accordingly!

The tax man makes no assumptions.  What happens under PAYE  is that each month 1/12 of your tax bands and allowances become available and are accumulated. If you take a large pension withdrawal at the start of the year you will have accumulated insufficient allowances to avoid paying a higher rate of tax.

The same thing can happen with one-off bonuses if you are employed.

PAYE works the way it does to monimise the chances of weekly/monthly paid employees being lumbered with an unepected tax bill at the end of the tax year which then has to be chased bty HMRC.  It does this job very well.  Not so good for drawdown pensioners but the costs of developing a new separate tax system could not possibly be justified.

presumably taking a one off sum of £12K in March would not be a problem

If it was your first withdrawal, you'd still get taxed on the emergency tax code.

Juno_Moneta

Isn’t the optimal answer to draw in month one whatever the personal allowance is at the time divided by 12. 

Therefore current PA of £12,570 / 12 = £1047.50 is the max month one drawdown to avoid any emergency tax. 

Then keep drawing £1047.50 each month until you are no longer on the emergency tax code. 

Then you are free to draw the remainder. 

So if eg this is sorted after 2 months, you’ve drawn £2,095 and can now withdraw the remaining £10,475 in month 3.
You’ve drawn a total equal to the PA and no tax has been paid emergency or normal (assuming no other sources of income of course). 

Dazed_and_C0nfused

Juno_Moneta said:

Isn’t the optimal answer to draw in month one whatever the personal allowance is at the time divided by 12. 

Therefore current PA of £12,570 / 12 = £1047.50 is the max month one drawdown to avoid any emergency tax. 

Then keep drawing £1047.50 each month until you are no longer on the emergency tax code. 

Then you are free to draw the remainder. 

So if eg this is sorted after 2 months, you’ve drawn £2,095 and can now withdraw the remaining £10,475 in month 3.
You’ve drawn a total equal to the PA and no tax has been paid emergency or normal (assuming no other sources of income of course). 

Is this a new version of PAYE you have heard about?

If the emergency tax code (1257L) is being used on a cumulative basis and someone has received a pension, paid by a pension company using monthly pay frequency, of £12,570 by month 3 of the tax year I think it's safe to assume you can expect to pay a fair whack in month 3.

In fact probably some 40% tax would be payable (on a tiny proportion of it).

Juno_Moneta

Did you miss the bit where I said “until you are no longer on the emergency tax code.”

If by month 3 your tax code is back to 1257L - then at any point in that tax year if your total income is £12570 you have no tax to pay, regardless of which month you achieve the total. 

But yeah I concede this can still go wrong depending on how monthly processing is handled but the principal of no tax to pay at that point is valid. 

Best answer then is just draw £1047.50 every month ( prevailing PA / 12 ).

QrizB

Juno_Moneta said:

If by month 3 your tax code is back to 1257L - then at any point in that tax year if your total income is £12570 you have no tax to pay, regardless of which month you achieve the total. 

I don't know how your employer handles PAYE, but I don't get to chew through my entire personal allowance in the first couple of months. They give me 1/12th of it a month. If my salary varies then they recalculate based on how many months have gone.

Hoenir

Juno_Moneta said:

If by month 3 your tax code is back to 1257L - then at any point in that tax year if your total income is £12570 you have no tax to pay, regardless of which month you achieve the total. 

That's never how the PAYE system has operated. 

Dazed_and_C0nfused

Juno_Moneta said:

Did you miss the bit where I said “until you are no longer on the emergency tax code.”

If by month 3 your tax code is back to 1257L - then at any point in that tax year if your total income is £12570 you have no tax to pay, regardless of which month you achieve the total. 

But yeah I concede this can still go wrong depending on how monthly processing is handled but the principal of no tax to pay at that point is valid. 

Best answer then is just draw £1047.50 every month ( prevailing PA / 12 ).

But 1257L is the emergency tax code.

You seem to have a fundamental misunderstanding of how PAYE works.

Juno_Moneta

Nope. Dazed_and_C0nfused said:

But 1257L is the emergency tax code.

You seem to have a fundamental misunderstanding of how PAYE works.

Why so passive aggressive?

You’re actually wrong, 1257L is NOT the emergency tax code by itself. 

Let’s bring Gov UK in for the definitive answer:

“Tax code 1257L

The most common tax code for tax year 2025 to 2026 is 1257L. It’s used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).

1257L is an emergency tax code only if followed by ‘W1’, ‘M1’ or ‘X’. ”

https://www.gov.uk/employee-tax-codes

sheramber

Whether on emergency code 1257X or cumulative code 1257L you get  1/12 of your personal allowance each month.

In month 3 , on a cumulative code 1257L you get 3/12 of your personal allowance to set against your income from 5 April to date. you do not get the whole year!s allowances again. 12570 allowances. 

That is 1047.50 so in month 3 you get 3x1047.50 = 3147.50 set against your total income from 5 April.

As you have already used up 2/12 of that allowance in  months 1+2 there is only 1047.50  left to set against the month 3 payment  of 10,475. Tax will be deducted. 

If that is your only income for the tax year 25/26 you can request a repayment of the tax deducted, but it will be deducted in the first place.