What are month zero charges?

[SciFi]

This is a follow up to a question I asked a while ago about SIPP lump sums & drawdown (viewtopic.php?f=30&t=39160 - Lots of helpful comments and I’m just about to start the process – Thanks for all those comments).

Hope this question still sits on this board. Apologies if not.

Someone (JohnB) mentioned “month zero charges” when being charged for drawdown(s).

The context is that I would take a single, yearly amount from a SIPP in drawdown of approx. £12K.

JohnB mentioned “NB, if you take it from HL on the 28th of March, you are still stung with month zero charges, as HMRC/HL expect you to take 11 more payments in the last 8 days of the tax year!

What are “month zero charges”? (I googled – no luck)

Why would I incur 11 more charges?
Indeed, why is drawing that lump sum incurring a charge at all? (Isn’t just like extracting cash from an ISA)?

Can I avoid those 11 extra charges??

Thanks

Pete

[monabri]

I assume that this relates to the assumption made by HMRC that if you draw an initial sum of money then every month after that will be the same sum...even though, in reality, it won't be. Hence, HMRC calculate tax based on an assumption your "income" will be 12 x the amount you withdrew. Not ideal, however but at least the overpaid tax is recoverable and the question should be which form do I fill in to get my overpaid tax returned?

[ursaminortaur]

I assume that this relates to the assumption made by HMRC that if you draw an initial sum of money then every month after that will be the same sum...even though, in reality, it won't be. Hence, HMRC calculate tax based on an assumption your "income" will be 12 x the amount you withdrew. Not ideal, however but at least the overpaid tax is recoverable and the question should be which form do I fill in to get my overpaid tax returned?

And as far as I am aware with other providers if you start your drawdown in the last month of the financial year (eg as in this example on the 28th March). then there won't be any assumption that you will take any more drawdowns that financial year and thus the correct tax will be taken. It is a fairly common strategy for people to just take a yearly drawdown and to do it in the last month of the financial year since the tax will then be dealt with correctly and they won't have to reclaim it. I don't have a SIPP with HL but would be surprised if they took extra tax in that case as the OP suggested.

[JohnB]

HL did, trust me. I'm still trying to get it back.

[SciFi]

So, how would I go about reclaiming the tax?
Or even better, making them not take it in the first place?

Is there a place on the HMRC website I should be looking at that describes all this?

Thanks

[JohnB]

I've finally got to request a refund after completing my tax return. Only the stupidity continues. After you are logged into their online portal, to get a refund paid you have to enter endless details from both your driving licence and passport to get access to a bank details page. They are up their own [expletive deleted].

[monabri]

Isn't it a P55 form?

https://www.moneysavingexpert.com/recla ... %20details.

[Toothfairy]

It’s not that HMRC assumes you’ll receive another 11 payments; it is the fact that the pension provider doesn’t know your tax code and therefore uses an emergency Month 1 / Week 1 tax code. That is the provider assumes you have already used your previous months' personal allowance and thus uses 1/12th of the allowance for the first payment.

Eventually HMRC will inform the provider of your correct tax code, but HMRC can only do that once they know you’re drawing a pension.

You can use form P55 to claim the overpayment of tax assuming it is the only lump sum payment you’re taking that tax year.
https://www.gov.uk/government/publications/flexibly-accessed-pension-payment-repayment-claim-p55

[swill453]

It’s not that HMRC assumes you’ll receive another 11 payments; it is the fact that the pension provider doesn’t know your tax code and therefore uses an emergency Month 1 / Week 1 tax code. That is the provider assumes you have already used your previous months' personal allowance and thus uses 1/12th of the allowance for the first payment.

Eventually HMRC will inform the provider of your correct tax code, but HMRC can only do that once they know you’re drawing a pension.

No that's not the case. Even if you have a correct tax code, you will be overtaxed if you take all your income as a lump sum early in the tax year.

You can use form P55 to claim the overpayment of tax assuming it is the only lump sum payment you’re taking that tax year.
https://www.gov.uk/government/publications/flexibly-accessed-pension-payment-repayment-claim-p55

Yes that's true.

Scott.

[Toothfairy]

It’s not that HMRC assumes you’ll receive another 11 payments; it is the fact that the pension provider doesn’t know your tax code and therefore uses an emergency Month 1 / Week 1 tax code. That is the provider assumes you have already used your previous months' personal allowance and thus uses 1/12th of the allowance for the first payment.

Eventually HMRC will inform the provider of your correct tax code, but HMRC can only do that once they know you’re drawing a pension.

No that's not the case. Even if you have a correct tax code, you will be overtaxed if you take all your income as a lump sum early in the tax year.

What's not the case? The question and the answer related to how the pension provider treats the first payment even if it is month 12 of the tax year, and the fact that with an emergency tax code you are taxed on a Month 1 / Week 1 basis with only 1/12th of the allowance available. In addition all I noted was that HRMC will eventually provide the Pension provider with the correct tax code; how that is used going forward is a different situation. I never claimed that there aren't situation where you can end up overpaying tax because neither HMRC nor the provider have a crystal ball.

Of course you will be overtaxed if you take all the income you intend to take for the year before month 12 of the tax year, as only the part of the personal allowance will available, and you can pay the high rate of tax as only part of basic rate tax band is available. Neither HMRC nor the pension provide know that you wont recieve any further income from any source prior to the end of the tax year. But then neither do you - as you can always change your mind and take further pension payments.

[swill453]

What's not the case?

Your statement "It’s not that HMRC assumes you’ll receive another 11 payments; it is the fact that the pension provider doesn’t know your tax code and therefore uses an emergency Month 1 / Week 1 tax code."

As I pointed out, even if you have a correct tax code, and the pension provider knows it, you will still be overtaxed if you take all your income as a lump sum before month 12.

Neither HMRC nor the pension provide know that you wont recieve any further income from any source prior to the end of the tax year. But then neither do you - as you can always change your mind and take further pension payments.

I know. But surely it's not beyond the wit of man to design a mechanism whereby you flag to the pension provider, and thus HMRC, that this is to be your only income this tax year, so it gets taxed correctly? More people must be using their pensions this way, and it must be causing them a lot of extra work dealing with the refunds.

If you change your mind, or get income from another source, they can always apply tax to that.

Scott.

[Gilgongo]

I was planning on taking accrued dividends out of my SIPP once per quarter when I'd retired. Not sure if I'd have enough to take a reliable amount out monthly though as it's a rather small pot.

So should I just plan to reclaim in the first year and be done with it? I suppose I could go annual though.

[Gilgongo]

Hm. AJ Bell have this rather complicated explanation (and call it "month 1"?):

https://www.investcentre.co.uk/sites/de ... ents_0.pdf

[xxd09]

Been taking a single variable amount lump sum once a year from my SIPP for many years
First sell the appropriate number of units/shares in the SIPP to get cash amount required
Get the cash then sent to my bank account
Cash is sent less tax -usually 20% in my case
If tax amount is more than it should be then reclaim online with P55 form
(Need to set up your Government Gateway Online portal to be able to use a P55 form) )
Tax rebate arrives -eventually- takes 3 weeks to 3 months!-into your bank account
That’s it-I use Interactive Investor
xxd09

[Adamski]

For info, if you instead take £1000 per month from April, the first withdrawals will be overtaxed, then the provider will contact hmrc and get a tax code from then and should correct in the tax year, without you having to do anything. That'd save you having to do a form p55, and being heavily overtaxed and then waiting 3 months.

Edit, the system works better with set monthly withdrawals, and otherwise is a source of frustration.