26 Apr 2017, 8:27pm
personal finance
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  • HMRC decide the Ermine’s gone to work for Goldman Sachs, taxes accordingly

    Flexible drawdown is great but it’s easy to get suckered for huge amounts of tax. Although I originally planned to draw my DC pension under the tax threshold over five years, paying zero tax, there is of course a problem with the best laid plans of mice and men, which is that things change. My original computation was imagining running down the cash saved into the SIPP, and I had invested it conservatively, with a fair lump in gold, some in VWRL and some in cash. Then Brexit happened and lifted the nominal value of the stocks and the gold, by destroying 20% of the real value of the pound. So I get to pay tax anyway where otherwise I might not have.

    In more change I am looking to buy a house, raising the cost of the new one before selling the old, and because I am a poverty-stricken bum under the railway arches according to the finance system’s favourite metric, income, nobody will lend me anything. I need to raise that in cash. So I paid more tax, drawing just short of the HRT threshold in a lump sum and then nothing for the rest of the year. It’ll only buy me half a used Lamborghini, perhaps a cut’n’shut.

     

    The ermine’s new place of work in HMRCs eyes – as teaboy, runner or floor sweeper. People at GS seem very coy about their pay, claiming it averages 64k for an analyst. In which case perhaps the Ermine gets a corner office, on nearly 10x that. I’ve even doing okay on FireVLondon’s pay ranges. Shame it’s an HMRC cockup and not real, eh?

    HMRC, on the other hand, seeing £43k come out have decided I am now working for GS as a teaboy and earning half a million pounds, arrived at by multiplying 43 by 12. Yeah, I wish, guys. What I told Hargreaves Lansdown is to can all monthly payments this year and pay out 43k, whereupon HMRC help themselves to 40% of it. Cheeky barstewards.

    I had been warmed up to this by the Telegraph (H/T Monevator). Although that article says this only applies if your pension provider has an emergency code 1 this isn’t true in this case. I went through that bunfight year before last as they still had me working for The Firm in 2015, despite the fact I hadn’t earned from there since 2012. But I never did anything with the P45 because I had no new employer to give it to. In fairness to them they did get it sorted out within a month and refunded the excess tax.

    So it’s time to do that all over again, via this link. Even if you fill in the form online it’s worth reading the print off and post form first, because the explanation of the form fields is much better on that. In particular I suspect I screwed up because I declared 43k as total amount of income I expect to get. Which is correct, but probably should have been zero, because the next box asks

    Details of pension flexibility payments paid as lump sums

    and I guess mine might be construed as a lump sum, although it’s not against the law to be paid one’s income annually in advance. But in the end 43k is the total amount of income I expect to get from that source.

    They also ask if you are contributing to the pension, and getting savings income and self employment income. In theory if you get all this right they will repay the overpaid tax. Which is over 10k – they helped themselves to £17,734 which is slightly over 40% of the total. Whereas they should have taken (43,000 – 11500)*20%=6300.

    Still, on the upside, once I have gone through this I will be able to run this SIPP down tax-free. I only have another 5400 in it. I will add £3600 this year and another 3600 next year, take my £1800 PCLS on the new money, leaving me with 10800 to run out tax-free in 2017/18. Unless, of course, the stock market takes a hissy fit which will probably jack up the price of the gold. If, of course, Brexit is the stupendous success that Barry Blimp tells us it will be I will take a bath on that gold and my ISA, guess that’s the price of being a saboteur and Volksverräter.

    There’s a lot to be said for being paid annually early in the tax year from a SIPP

    On reflection, although last year I drew from the SIPP on a monthly basis, that’s probably not the smartest way to do it, if you know how much you’ll be drawing that year. Drawing it all at the beginning of the tax year lets me get the money to work for me earlier – Hargreaves Lansdown don’t pay a particularly exciting interest rate on cash in a SIPP, so I may as well pull a large lump sum as soon as I can and get it working for me rather than funding Peter Hargreaves Brexit ambitions. I went monthly because of the warm fuzzy feeling of it being a simulacrum of my old employment income, but what the hell, I coasted for three years on investment income and savings and didn’t overspend.

    I should have behaved like a grown up and made this work for me being paid up front, even if I had to fill in a P55 form every April. Ain’t hindsight a marvellous thing? After this one it will never apply to me again, because I have too little left in the SIPP. Unless they pull the same stunt when I take £10k next year, and assume I will be earning £120k.

     

    Notes:

    1. ie they assume you earn at least the personal allowance elsewhere and tax you at 20% on everything

    Very sorry to hear about your troubles with the Esteemed Keepers of Her Majesty’s Coffers. HMRC (or HMRD as I call them, for HM Revenue & Dickheads) can be dumb beyond belief. I discovered this to my intense dissatisfaction a couple of years ago, when I had a so-called pleasure of corresponding with them with regards to their proposal to charge me c. £3k in tax and fines I didn’t owe. Such fun.
    I found telephone worked much better than letters, and even then it can be hard to get through their usual “computer says no”.

    Thanks for the commiseration! Hopefully it won’t come to a fight, but one never knows. Apparently the correct way to do this is to draw a small amount first, because the tax code is generated at the start of the tax year. So drawing £500 first and then the remaining £42500 would have worked better. But I didn’t know that. At least they have a process for the reclaim, since it’s such a frequent occurrence.

    why was it you wanted to buy before you sell?

    Because everything about buying and selling property in the UK is hateful enough without being a middle link in a chain, for once I want to have the upper hand, and hell, I’m good for the cash at this stage in life.

    I took a major stuffing on property years ago, which means I didn’t carry too much house across my working life. As a result the proportion of my networth in housing is low for my peer group, who are often into BTL etc. So effectively I want to do BTL for myself to make life easier for a short while.

    27 Apr 2017, 1:14pm
    by The Rhino

    reply

    ‘I took a major stuffing on property years ago’
    did you? I didn’t realise 😉
    only kidding – hope it works out well without too much trauma

    Will you get hit up for the extra 3% stamp duty though?

    > Will you get hit up for the extra 3% stamp duty though?

    Yes, but provided I sell within three years I get it back, so it’s a cashflow problem. I have no desire to rent my old house out.

    I know I’m going to lose money on this, it’s a stupid time to be going upmarket, but I am not going hugely upmarket, maybe 100k up if I’m unlucky, it’s also a change of scene and taking the opportunity with what Mrs Ermine is doing. So it’ll cost me about 50k probably, because everything will look cheaper in two years time. If I stay there another 20 years it’ll look like trivia in the noise.

    But sod it, I don’t aim to take it with me, so now is the time for us 🙂

    27 Apr 2017, 2:44pm
    by Spindrift

    reply

    There is a nice little form that lets you claim the extra SDLT back without too much difficulty. Just keep all the reference numbers (especially if you pay it through a conveyancer).

    Since I’ve now reached the magic year in which I turn 71 I have to convert my RRSP (your SIPP) to something called a RRIF and start drawing it down. Of course all funds are fully taxable at my marginal rate.
    So I converted in January, took out the minimum and don’t have to pay the taxes until April 2018. The money funded my wife’s and my TFSAs (your ISA.) So at least it’ll carry on tax free for a year and a bit.
    The only downside – aside from paying taxes – is that my yearly tax bill will increase to the point where I’ll need to pay in quarterly installments – but they were going to get me anyway. Death and taxes and all that.

    I empathize with your troubles getting a mortgage and having to pay in cash: I used to hear “banks only lend to the rich”, which is completely inaccurate. In practice, banks only lend to people with a high income. Wealth is irrelevant in their math. That’s the reason I’ll be keeping a job much more longer, so that we can secure a loan.

    > banks only lend to people with a high income

    That seems to be so true, and it caught me on the hop ever since retiring, because I’d discharged my mortgage the year before.

    What counts as income is distorted by the fact that a retiree doesn’t draw income they don’t need. I’ve never drawn money from my ISA, because I don’t need it and want it reinvested to grow tax-free. Since it doesn’t go through my bank account, that’s another £5000 of income I don’t appear to have.

    Unlike the wage-slave me, the retired me has ‘income’ coming from disparate sources, and if I don’t need it I leave it to grow. Banks can’t grok that sort of ‘income’ at all.

    @ Ermine, I read on another FI site that the author got a mortgage to buy after leaving his job …..& he’d been worrying about precisely this catch-22 issue. He wasn’t optimistic that they could get around their own bureaucracy, but had a go anyway & found that they accepted his investment income as they would a salary.

    Caveats here are that it was in the US & there was evidence over enough of a period of time to indicate a consistent pattern, thus alleviating the lender’s fear you can’t pay it back. He chose to show them only an income stream they were most likely to understand [that most mimicked a regular salary] so like the P2P variants here that pay out monthly interest at a set rate for e.g.

    Maybe you should check it out similarly – there are now some less hide-bound new challenger financial institutions even here these days, who might be less blinkered in their approach…..

    1 May 2017, 7:27pm
    by Colin Morrison

    reply

    Hi, Don’t normally comment but brilliant article, had me in stiches… BTW I’m downsizing so I can reclaim time and money 🙂 Cheers

     

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