Tax code for SIPP withdrawal

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81885950#Comment_81885950

They would normally use either the emergency code (on a non cumulative basis) or code BR for all first pension payments, based on existing guidance from HMRC.

HMRC don't know you are getting the pension until after the first payment has been reported to them. They may then issue a new tax code for the pension company to use.

Have you looked to see what your Personal Tax Account shows for this pension?

molerat

Any code shown in your personal tax account is the code allocated by HMRC for future payments, codes previously used are not shown against any payments / income streams. If the code has an X suffix, which seems to be the default in many cases, and you wish to take more this year then you need to contact them to get the code changed. This may change automatically if you update the estimated income from that stream to the total you will be taking in the year, it will only take a day or two to update so nothing to lose.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81885950#Comment_81885950

One thing to remember is that PAYE operates on the basis that you get a regular income over the year. If you draw your pension in lumps or just once a year then PAYE is not going to work smoothly and you may find yourself reclaiming bits of overpaid tax. Assuming you have a cumulative tax code the sensible thing to do is to make the (or a) withdrawal in March. Or you can make smaller withdrawals on a monthly basis but that does not always sit well with how your pension provider operates (eg if you are doing UFPLS).

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81886023#Comment_81886023

I'm sure that's true but HMRC did say they were going to be improving this aspect of tax codes.

https://www.gov.uk/government/publications/pensions-schemes-newsletter-166-january-2025/newsletter-166-january-2025

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/81886027#Comment_81886027

That is a logical explanation. I guess HMRC wants to collect tax when it is due rather than waiting until after year end and their starting assumption is that what I draw this month is what I will draw in future months. Is that the case?

https://forums.moneysavingexpert.com/discussion/comment/81886037#Comment_81886037

That sounds good but, using my situation as an example, how would HMRC "automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code".

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81886173#Comment_81886173

When the pension payer makes the first payment they report those details to HMRC and that new pension should be added to your tax record.

An automated review is usually then done to check what tax code should be in place for that new pension.

It may be as simple as the emergency tax code is the correct one but it can be issued on a cumulative basis. Which would mean the pension payer could automatically refund any overpaid tax next time they make a payment to you (but only if that is in the same tax year).

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/81886185#Comment_81886185

Thanks. My HMRC account says my estimated tax this FY is £226, yet I have just paid over £4500 on the SIPP withdrawal. What are the chances that if I make another withdrawal of £100 I will receive something over £4000?

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81886194#Comment_81886194

It will depend on three things,

1. The exact amount of additional income taken.

2. If the code has been issued on a cumulative basis

3. If the next payment is in tax month 11 (to 5 March 2026) or tax month 12 (to 5 April).

DRS1

I guess HMRC wants to collect tax when it is due rather than waiting until after year end and their starting assumption is that what I draw this month is what I will draw in future months. Is that the case?

Yes. PAYE is all about collecting tax when you get paid rather than waiting till the end of the tax year.

I am not sure they assume you will draw the same each month though for the typical pension and employment income you do get paid the same or similar amounts each month. The key thing to remember when you are drawing in lumps or a single amount each year is that the allowance you have is not applied all in one go instead it is spread out over the year. So if your tax code is 1257L (on a cumulative basis) you can draw £1k per month of taxable income and have no tax deducted. But if you draw the whole £12k in May you are going to see a lot of tax deducted because you are only two months into the tax year. I believe you can get £1048 per month with no tax deducted on a 1257L code. They also slice up the basic rate and higher rate bands into 12ths so it is easy to go through the basic rate band into higher rate by taking a big draw in one month.

Linton

After the first emergency code taxable drawdown HMRC will issue a cumulative tax code. This has the effect that future drawdowns from the same account in the same tax year will over time repay initial excess tax.

The new tax code will depend on your circumstances. In my case with SP using all my tax allowance and only occasional drawdowns HMRC have allocated a fixed basic rate code. If you have no other income I would expect a cumulative 1257L.