Month 1 tax

Pension tax

Pension tax works in the same way as income tax. Your pension provider will use the Pay As You Earn (PAYE) system to deduct any tax due before you receive your payment. 

After taking any initial tax-free lumps sums, the income you take from your SIPP is taxed like any other income.

You will be issued a tax code by HMRC which governs how tax will be deducted from your income payments. You may be charged an emergency tax rate known as Month 1 tax on your first income withdrawal from your SIPP, if we have not received confirmation of your tax code from HMRC.

The emergency tax code assumes that you will carry on receiving the same amount each month even if the money you are taking is a one-off withdrawal, which means that you may pay more tax than is actually due.

What to do if month one tax is applied to your withdrawal

You can find the tax code that we currently hold on record for you in your online account. From the menu, select SIPP > Tax code. 

If your tax code ends in ‘M1’ or your tax basis shows as 'Month 1', you will know that your payments are subject to an emergency tax rate pension withdrawal. 

For most people, being placed on pension emergency tax will result in an overpayment of tax. Currently, it is the individual’s responsibility to claim the difference back from HMRC.

You can reclaim emergency tax on pensions by contacting HMRC directly. They will check your tax record and either issue a refund to you or they will issue a new tax code to your pension provider. The new tax code may then be used to calculate the tax due on all future withdrawals – offsetting the amount you have already paid if applicable.