Calculating max SIPP withdrawal to avoid 20% tax

aroominyork

I am heading towards retirement a couple of years before accessing SP and want to withdraw the max from my SIPP to avoid paying 20% tax. On https://www.tax.service.gov.uk/guidance/work-out-tax-on-your-savings-or-dividend-income/start/tax-year I have entered:

Dividend income £13,500

Savings £3,500

Other income £15,170.

The site tell me £13,000 of dividends will be taxed at £8.75% and £100 of income at 20%, so the max income I can withdraw without 20% tax is £15,070. Can someone kindly walk me through how this is calculated so that, when I have a clearer picture of year end dividend and savings income, I can re-calculate the amount to take from SIPP (from crystallised funds). Thanks in advance.

Keep_pedalling

When you say savings £3,500 is that income or the total amount of savings? 

leosayer

Any charitable donations?

DRS1

You have the personal allowance (£12570)
Then you have the starter rate for savings (£5000)
Then you have the personal savings allowance (£1000)
Then you have the dividend allowance (£500)

If your other income goes over the personal allowance you lose part of the starter rate for savings (pound for pound).  Your other income is £2600 over the personal allowance so you knock that off the £5000 to get £2400.  That means you have £3400 (starter rate and PSA) to set against £3500 of savings income.  So £100 of that is taxed at 20%.

I confess I do not understand why part of your £15170 other income would not be taxed at 20% though.  Surely £2600 of it is taxed at 20%????

phlebas192

aroominyork said:

I am heading towards retirement a couple of years before accessing SP and want to withdraw the max from my SIPP to avoid paying 20% tax. On https://www.tax.service.gov.uk/guidance/work-out-tax-on-your-savings-or-dividend-income/start/tax-year I have entered:

Dividend income £13,500

Savings £3,500

Other income £15,170.

The site tell me £13,000 of dividends will be taxed at £8.75% and £100 of income at 20%, so the max income I can withdraw without 20% tax is £15,070. Can someone kindly walk me through how this is calculated so that, when I have a clearer picture of year end dividend and savings income, I can re-calculate the amount to take from SIPP (from crystallised funds). Thanks in advance.

That calculator is just for dividend & savings tax. £15,070 of taxable pension income will see £2,500 of it taxed at 20%, ie £500 of income tax. You would have to reduce the taxable pension income to £12,570 to avoid any being taxed at 20%.
Of course, if you are withdrawing using UFPLS then you could take out £16,760 from the pension - £4,190 tax free with the remaining £12,570 using up the personal allowance.

aroominyork

Keep_pedalling said:

When you say savings £3,500 is that income or the total amount of savings? 

Interest from savings.

leosayer said:

Any charitable donations?

Good point! £1300.

phlebas192 said:

aroominyork said:

I am heading towards retirement a couple of years before accessing SP and want to withdraw the max from my SIPP to avoid paying 20% tax. On https://www.tax.service.gov.uk/guidance/work-out-tax-on-your-savings-or-dividend-income/start/tax-year I have entered:

Dividend income £13,500

Savings £3,500

Other income £15,170.

The site tell me £13,000 of dividends will be taxed at £8.75% and £100 of income at 20%, so the max income I can withdraw without 20% tax is £15,070. Can someone kindly walk me through how this is calculated so that, when I have a clearer picture of year end dividend and savings income, I can re-calculate the amount to take from SIPP (from crystallised funds). Thanks in advance.

That calculator is just for dividend & savings tax. £15,070 of taxable pension income will see £2,500 of it taxed at 20%, ie £500 of income tax. You would have to reduce the taxable pension income to £12,570 to avoid any being taxed at 20%.
Of course, if you are withdrawing using UFPLS then you could take out £16,760 from the pension - £4,190 tax free with the remaining £12,570 using up the personal allowance.

DRS1 said:

You have the personal allowance (£12570)
Then you have the starter rate for savings (£5000)
Then you have the personal savings allowance (£1000)
Then you have the dividend allowance (£500)

If your other income goes over the personal allowance you lose part of the starter rate for savings (pound for pound).  Your other income is £2600 over the personal allowance so you knock that off the £5000 to get £2400.  That means you have £3400 (starter rate and PSA) to set against £3500 of savings income.  So £100 of that is taxed at 20%.

I confess I do not understand why part of your £15170 other income would not be taxed at 20% though.  Surely £2600 of it is taxed at 20%????

I didn't clock that the calculator it is only for savings and interest. I saw "Basic (20%)" but didn't clock the heading saying it was for savings interest. Thank you.

Am I right that earnings are taxed first, then savings, then dividends? So I should keep earnings/crystallised SIPP income under £12,570 and savings income under £6000, and I can receive dividends up to the higher tax rate. Is that correct? Where does the £1300 charity donations adjustment come in?

DRS1

Where does the £1300 charity donations adjustment come in?

Well if you go for gift aid I think you need to pay at least as much tax as the charity reclaims from HMRC.

aroominyork

So I need earnings/SIPPs of £12570 + £1300 = £13870 to ensure I've paid the tax to cover the gift aid?

DRS1

aroominyork said:

So I need earnings/SIPPs of £12570 + £1300 = £13870 to ensure I've paid the tax to cover the gift aid?

I am not sure if that is right.  Is the 1300 net or gross?  Gift aid is like pension contributions the charity gets 20% of the gross contribution so 25% of the net contribution.  So if £1300 is your net contribution you need to have paid £325 of tax which means you add £1625 not £1300.

But I could be wrong.

Also I see it says the tax paid could be CGT as well as income tax.

leosayer

I asked this question last year....might be of help:

https://forums.moneysavingexpert.com/discussion/6606260/pension-drawdown-taxation-and-charitable-donations

Dazed_and_C0nfused

aroominyork said:

So I need earnings/SIPPs of £12570 + £1300 = £13870 to ensure I've paid the tax to cover the gift aid?

If your Gift Aid donations were £1,300 then that would be a gross donation of £1,625.  Meaning the charities have received £325 in basic rate relief.

So you need to pay £325 in tax to avoid getting a bill for the basic rate Gift Aid tax.

You need to look at your overall income tax situation to understand if you will have paid enough tax.  You seem to be overlooking the £13,500 in dividend income.  If your Personal Allowance has been used by earnings and pension income then all £13,500 will be taxed.

The first £500 at 0% and, from what you've posted, the remaining £13,000 at 8.75% or 10.75% depending on which tax year this relates to.  So more than enough to satisfy your Gift Aid donations.