Stand-out Q – taking income…
Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.
A client wants to take income of £20,000 from their SIPP. How will this be taxed?
Once an individual has used up any tax-free cash entitlement, any withdrawals from their SIPP will be income withdrawals.
Whenever a member withdraws income from their pension, income tax may be due. Even where the individual will not incur UK income tax (if, for example, they are non-UK resident or the income is covered by their personal allowance), scheme administrators are obliged to operate PAYE on any income payments made to the member.
The amount of income tax deducted at source is determined by the PAYE tax coding notice applied. The coding notice is provided by HMRC.
Where the income withdrawal is the first to be taken from that pension fund, an emergency code may be applied. An emergency code may also be applied to subsequent withdrawals unless HMRC have issued an amended notice of coding for the scheme administrator to apply for the remainder of the tax year.
If the income source is on going, in other words the pension fund is not exhausted with the first income withdrawal, a cumulative code may be applied. Where more than one withdrawal is made in any calendar month from the same source, the scheme administrator may (if their systems allow this) be able to treat all income payments as falling within the same income source. This means that the existing code can be applied to the additional income withdrawal, rather than the emergency code.
Although PAYE is deducted from the income payments, this may not equal the actual income tax liability due on the income withdrawals taken in the tax year. HMRC has issued forms which individuals can complete to claim any overpayments of tax during the tax year, and some providers may be able to process PAYE refunds where cumulative coding notices have been issued. Small underpayments can be reclaimed through coding notices in the following tax year.
Where the necessary tax adjustments cannot be made during the tax year, HMRC may issue a calculation after the year end to detail any under or over-payments. Ultimately, the member can complete a self-assessment tax return to finalise their income tax position for the year.
We have published a Tech Talk which discusses the operation of PAYE and the methods for claiming any refunds of overpaid tax in more detail
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