T tax codes

7th Apr '21 by john2

7 comments 389 reads

As a result of the stock market's rapid recovery from the Covid slump I have made unrealised profits greater than £100,000 in my ISA and SIPP in the past tax year. I will pay myself somewhere between £15,000 and £20,000 from my SIPP in the coming tax year, and paid myself around £16,000 in the year to April 2021. I was surprised to receive a message from Hargreaves Lansdown this afternoon telling me that I will have a T tax code for the coming tax year, which is the code for those with income of £100,000+ and reduces my tax-free allowance for the coming year.

I thought that the income from an ISA was tax-free in all respects. My SIPP has only risen by £67,000 in the past tax year, and while my unrealised investment gains in the ISA and SIPP combined are greater than £100,000 the vast majority of these gains are unrealised and in the event of a stock market crash would never be realised. Does anyone have experience of this situation, and can anyone advise me how to proceed?

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iantjie

7th Apr '21

Hi John2, if I was you, I'd get an accountant to take a look at it. To my mind, it doesn't seem right on several levels; one, as you say the gains are for the most part unrealised, so they should not be treated as income; two, the funds in an ISA should have no bearing on any tax consideration; and three, it's not up to HL to issue tax codes, that's HMRC's job. I wonder if HL are just trying to cover themselves in some weird way.

Get a decent accountant on to it and I'm sure it'll resolve in your favour.

Wilbraham

I'd agree the ISA or the unrealised gain in the SIPP should have nothing to do with this (at least until you hit the LTA). A T tax code doesn't from my googling mean you're deemed to be in the > £100k tax bracket.

I made the following notes after seeing an IFA a few years ago - possibly this hints at what's happened, especially if you were making annual, not monthly, drawdowns:

''If not opting to draw a huge amount of pension income initially, the smart move is to drawdown say £1k in month 1 following first crystallisation (1/12^th of basic personal allowance threshold) as administrators are required by HMRC to deduct PAYE on the assumption that this continues for the remaining 11 months, then £11k in month 2 and nil in months 3 – 12. Month 1 need not be April; it is the first month in which any benefits are drawn. [ND said this pattern is ‘crucial for the life of the pot’, implying that the initial tax treatment would apply also to all subsequent years. However, she accepts that it will all be trued-up in end of year tax returns and it is possible anyway to write to HMRC (via the plan administrator?) to request a more reasonable PAYE coding if one is disadvantaged by the standard system.]''

There used to be a good website (pruadviser ?) that gave a lot of technical advice on tax/LTA issues aimed primarily at advisers not Jo Public.

PS I see my tax code has just moved from a T to an L so I don't think we can read much into this. I'd be surprised if you find an accountant prepared to give free one-off advice - most would surely want to develop an on-going relationship. I'd suggest googling a bit more or maybe phoning HMRC.

Gromley

Hi John,

It may well be that lantjie is right and you may need to get professional advice. But if you're anything like me, you'll want to find out as much as you can yourself before employing a mega-bucks consultant who will borrow your watch to tell you the time and then slap you with a huge invoice.

A few things here that might help (I should say that I am not a tax expert - although I suspect I may become one in the next couple of years!)

According to HMRC a 'T' tax code means : "Your tax code includes other calculations to work out your Personal Allowance" - this does not follow that your income is assumed to be > £100,000. Did you assume this or is that what HL told you?
Presumably HL are you SIPP host? I have yet to experience of having payouts from SIPP, so I don't fully understand the mechanics. I am guessing though that they handle your PAYE as if you are an employee? That would I think lanjie's question as to why they are involved with your tax code - nevertheless they don't set you tax code HMRC do. I would expect HMRC to communicate directly to about your tax code (probably also communicating with HL at the same time).

Just a few additional clarifications - which are all AFAIK so don't take any of this a gospel.

1. Your ISA gains are indeed not subject to taxation or tax thresholds etc. Neither are withdrawals from your ISA. NB just for clarity I have avoided using the term 'income' there, in tax terms AIUI 'income' is not generated by an ISA.

2. Is your SIPP above the LifeTime Allowance? My research thus far is making my head spin about the mechanics of how tax above LTA - it all seems unduly and unnecessarily complex, but may impact your tax code.

Personally I would firstly ask HL to explain why they think your tax code is a 'T'. If there answer is simply, "because HMRC said so" then I would contact them for a clarification. Ordinarily I would have thought you should have a had a letter from HMRC informing you of your tax code and giving (or attempting to) an explanation of how it has been determined.

HTH

john2

Thank you Gromley (and everyone else), I do intend to contact HMRC about this but I was just trying to get any useful help that I could before doing so.

HL tell me that they were informed of this tax code by HMRC.

I should have looked up the meaning of the T tax code on the HMRC site - the information about incomes > £100,000 came from the first web site thrown up by my Google search.

My SIPP is some way below my lifetime allowance.

I have been taking payments from my SIPP for 5 or 6 years. What usually happens is that in April I withdraw £12,000 or so - anyway, an amount just below my tax-free allowance for the year. HL always deduct 20% from this to forward to HMRC, I fill in a form P55 on the HMRC web site and pretty promptly I receive a cheque for the 20% that was deducted. I'm pretty happy with the way this works.

I do agree that HMRC should have written to me explaining why they wish to lower my tax-free allowance for the year.

The Phoenix

Hi it could possibly be that if the last tax year 20/21 was when you first took income from your Sipp they haven't updated your tax code yet.

As an example if you took 16k out on April 06.20 and nothing there after if the provider doesn't have a tax code for you they assume your income as 16kx12 so essentially 16k per month income which might explain why they have your income in excess of 100k when in reality its far lower than that.

I'm assuming here you don't have any other taxable income other than the 12k you took out of your Sipp for 20/21 tax year.

smegster

John2,

If you check you personal tax account, you can see the estimated income that the tax office thinks that you are earning.

https://www.gov.uk/personal-tax-account

You said that you paid yourself £16,000, if you had paid yourself in a single month, maybe the tax office has assumed that this is your new monthly income (so you annual income will be over £100,000) - if this is what has happened -then you can adjust the income number in the personal tax account to correct for this error

KevinS1

20th Apr '21

I have a SIPP with HL and I have heard of this before - I am not yet drawing mine. I believe that the comments above are correct in that your initial payment/withdrawal is viewed as being the first of an annual series and therefore the tax code/payment is derived using this assumption.

I have heard of people simply taking £1 as their initial withdrawal which allows them to get the full tax-code and zero tax paid. I then assume you sort the tax out later in the year or at end of the year through your tax return.

Good luck. I am sure it will work itself out.

T tax codes

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