Drawing more than required to use full tax band

RecliningInPeace

Let's assume that I have a SIPP that can comfortably handle annual withdrawals of more than £70k - if I could ask that you just accept this assumption for now.

Also assume my annual post tax income need is £50k.

Finally, the SIPP is the only source of income but I have an ISA too. No state pension for another 12 years.

Figures below are rounded and approximate. Current tax rules apply.

To get £50k post tax I'd have to withdraw just short of £56k, of which £14k is tax free, and the taxable part nets £36k (£42k less £6k tax).

My question is, would it make sense to use the full 20% tax band, withdrawing around £66.5k, of which £16.5k is tax free leaving me right up against the top of the 20% band, and putting the excess income into my ISA, or using some to bolster my emergency cash pot? It would use more tax free cash this way but I will go over the £268k limit anyway at some point. Does it really matter using the maximum available in the tax band or would the net result just be the same?

Thanks 

El_Torro

If you are doing this to avoid potentially being a 40% tax payer at some point in the future then I would say it makes sense. You can always put the excess in your ISA and invest in there if you want. 

If you don't envisage a scenario where you will be a 40% tax payer then there is less reason to do this. 

michaels

Easy, yes.  With the bands frozen inflation is your enemy so max out the lower band now.

You might also need to think about inheritance tax and gifting/PET that might make it even worth paying 40%

DRS1

If you have an emergency cash pot that is not in an ISA  then the SIPP won't be your only source of taxable income.  Just make sure you allow for all your taxable income when checking you are under the top of the basic rate band.  You don't want to be the real person in those "an extra £1 of income cost me £x00 of tax" articles

When you run out of TFLS (about age 72?) then you will probably want to draw on your ISA.  Does that need building up?  I know you mention putting the "excess" into your ISA but that "excess" is less than £20k.  Would you not want to max out the ISA contributions?  Presumably not if that puts you into higher rate tax.

Most people who draw what they spend will build in an annual increase to their draw.  You may be restricting yourself on that front if you adhere to a basic rate and no more policy.

RecliningInPeace

Thank you for the replies.

@El_Torro - yes I will go into the 40% band at some point so that's a good point.

@michaels - At the moment IHT is not a key consideration for me given no dependants and my wife has sufficient means, but I get the point, thanks.

@DRS1 - Re crossing bands, indeed, I need to be careful. In reality I'll leave some wriggling room and will keep an eye on interest and possible other taxable income.

Yes, TFLS should run out around age 72 at which point the ISA will come into play. I have a fair bit in there and with the additional (albeit small) contributions and growth between now and then, it should help keep me in the 20% band for a good while.

Re your last point, I'll likely go into the higher band at some point as my plan does include increasing drawings. It's a long way off (my initial £50k need is only for a couple of years, then drops to around £40k, then increases by inflation annually), but my intended approach is to take what I need, minimise the tax burden, but not let tax dictate the plan (see earlier point re inheritance).

Thanks again.

Wobble101

RecliningInPeace said:

Let's assume that I have a SIPP that can comfortably handle annual withdrawals of more than £70k - if I could ask that you just accept this assumption for now.

Also assume my annual post tax income need is £50k.

Finally, the SIPP is the only source of income but I have an ISA too. No state pension for another 12 years.

Figures below are rounded and approximate. Current tax rules apply.

To get £50k post tax I'd have to withdraw just short of £56k, of which £14k is tax free, and the taxable part nets £36k (£42k less £6k tax).

My question is, would it make sense to use the full 20% tax band, withdrawing around £66.5k, of which £16.5k is tax free leaving me right up against the top of the 20% band, and putting the excess income into my ISA, or using some to bolster my emergency cash pot? It would use more tax free cash this way but I will go over the £268k limit anyway at some point. Does it really matter using the maximum available in the tax band or would the net result just be the same?

Thanks 

It’s late and I’m no doubt tired, but I don’t understand your tax band calculations. Doesn’t  the 20% tax band end at £50.270 - so where does your £66.5k figure per year come from? And why is your tax free allowance £16.5k rather than £12,570? 

michaels

Wobble101 said:

RecliningInPeace said:

Let's assume that I have a SIPP that can comfortably handle annual withdrawals of more than £70k - if I could ask that you just accept this assumption for now.

Also assume my annual post tax income need is £50k.

Finally, the SIPP is the only source of income but I have an ISA too. No state pension for another 12 years.

Figures below are rounded and approximate. Current tax rules apply.

To get £50k post tax I'd have to withdraw just short of £56k, of which £14k is tax free, and the taxable part nets £36k (£42k less £6k tax).

My question is, would it make sense to use the full 20% tax band, withdrawing around £66.5k, of which £16.5k is tax free leaving me right up against the top of the 20% band, and putting the excess income into my ISA, or using some to bolster my emergency cash pot? It would use more tax free cash this way but I will go over the £268k limit anyway at some point. Does it really matter using the maximum available in the tax band or would the net result just be the same?

Thanks 

It’s late and I’m no doubt tired, but I don’t understand your tax band calculations. Doesn’t  the 20% tax band end at £50.270 - so where does your £66.5k figure per year come from? And why is your tax free allowance £16.5k rather than £12,570? 

Each drawdown will include 25% tfls