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Paying tax on SIPP

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I have a 1257L tax code and no income other than my SIPP. so far this tax year I have withdrawn £1000, which was not taxed, and £4000 the following month that was taxed. Please can someone clarify how this works? I have only used £5000 of a £12570 tax free allowance for the year

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  • af1963
    af1963 Posts: 406 Forumite
    Fourth Anniversary 100 Posts Name Dropper
    PAYE takes what you've earned to date, and allocates tax on the assumptino that you'll keep earning at the same rate.

    £1000 in month 1 would be extrapolated as being the first of twelve monthly withdrawals of £1000, which would add up to £12000 and be still below your annual tax allowance.

    £5000 across months 1 and 2 would be extrapolated as the first two months from twelve, with an average monthly withdrawal of £2500. This would add up to £30000 over a year which is above your tax allowance, so some tax would be taken.

    If you take no more income this tax year, or less than about £7.5k, you'll be due a refund of all the tax paid.  If you take more than £12.5k in total but less than £30k, you'll probably be due a partial refund, depending how much was actually taken.  
  • Marcon
    Marcon Posts: 14,431 Forumite
    Ninth Anniversary 10,000 Posts Name Dropper Combo Breaker
    I have a 1257L tax code and no income other than my SIPP. so far this tax year I have withdrawn £1000, which was not taxed, and £4000 the following month that was taxed. Please can someone clarify how this works? I have only used £5000 of a £12570 tax free allowance for the year
    £12,570 is spread over 12 months, giving you a tax-free element which builds up cumulatively (unless your tax code dictates it is week 1 or month 1) at the rate of £1,047.50 a month. So at this stage in the tax year, you've only built up 3 months of 'tax free' amounts - £3,142.50. You withdrew £4,000, which exceeded that, so you paid tax.


    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • Linton
    Linton Posts: 18,155 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    edited 8 July at 3:30PM
    af1963 said:
    PAYE takes what you've earned to date, and allocates tax on the assumptino that you'll keep earning at the same rate.

    £1000 in month 1 would be extrapolated as being the first of twelve monthly withdrawals of £1000, which would add up to £12000 and be still below your annual tax allowance.

    £5000 across months 1 and 2 would be extrapolated as the first two months from twelve, with an average monthly withdrawal of £2500. This would add up to £30000 over a year which is above your tax allowance, so some tax would be taken.

    If you take no more income this tax year, or less than about £7.5k, you'll be due a refund of all the tax paid.  If you take more than £12.5k in total but less than £30k, you'll probably be due a partial refund, depending how much was actually taken.  
    This is often stated but this is not how PAYE works.  As Marcon explained the tax allowance and tax band values are drip fed by 1/12 each month throughout the tax year.  There is no assumption at all as to what would happen in future months, tax is calculated on the basis of tax allowances assigned to date compared with income taken to date.
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