UC & Tax implications of cashing in small SIPP

DickieKay

Hope everyone is fine and dandy and getting some much needed sunlight.

In a couple of months I'll be 55 and I have a small amount (£1600 approx.) in a SIPP.

I am on UC and I get Standard + LCWRA + Housing

My pickle stems from what my tax liability on withdrawing the lot. The back of the fag packet calculation for the maximum is £300 tax. But I am not sure what is counted as taxable income when referring to UC. I thought I read/saw/dreamt that UC is tax free, not sure what this means in this situation, though.

Current UC: £1,232.04 PM - Standard - £400.14 - LCWRA - £423.27 - Housing - £408.63

The amounts will change slightly next month with the April rises, but you get the idea.

Although I have braced myself for the full £300 I would really appreciate any input as to whether I have got this right or not.

Also if I have tax liability, who do I pay it to?

Marcon

UC is a non-taxable benefit.

Your SIPP provider will deduct tax at emergency (basic) rate on 75% of your withdrawal as you're taking the whole lot in one go. The other 25% is tax free. You will need to reclaim the tax yourself from HMRC.

You could take withdrawals from your SIPP over a period of months to avoid overpaying tax. That could be just as quick as trying to get the tax back!

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6664489/uc-tax-implications-of-cashing-in-small-sipp

The emergency tax code is 1257L so on a first (taxable) payment of £1,200 you can expect £30 to be deducted, not £300.

If you are aren't ultimately liable to pay any tax then this will be automatically refunded, typically in summer 2027.

But you can make a claim to HMRC yourself prior to that if you wish. Or split the payments into two as @Marcon mentioned.

Altior

Unless the cash is needed, and it's affordable, ideally some funds would also be going in the opposite direction to get the tax relief, up to £2880 net annually (assuming there is no earned income).

QrizB

You should probably ask on the Benefits board to see what (if any) effect this might have on your UC.

https://forums.moneysavingexpert.com/categories/benefits-tax-credits

Grumpy_chap

AIUI if the OP takes the full sum it is treated as capital.

If the OP takes the income monthly then I understand it is treated as income.

Difference in the impact to UC calculation.

Altior

Lump sum withdrawals are fine for UC. A regular withdrawal is considered unearned income (eg £100 a month).

Going the other way, deprivation is a theoretical omnipresent spectre, but regular modest payments should pose no issue. If an individual is on earned income and UC, pension contributions are incentivised.

Altior

At some point in the next few years I will probably be applying for UC. I am contributing £240 per month, to maximise my tax relief. Deprivation is actually quite a high test - 'A person is to be treated as possessing capital of which the person has deprived themselves for the purpose of securing entitlement to universal credit or to an increased amount of universal credit'. I'm contributing to a pension for tax relief and financial security when I'm retired. Simple as that.

DickieKay

Thanks, I have a clearer idea now. It's all going on the credit card so no deprivation of capital to worry about.