Quarterly statistics from HM Revenue & Customs reveal that between 1 April to 30 June 2017, it repaid a total of £26,835,357 in overcharged tax, wrongly applied when people withdrew pension funds.

HMRC processed the following:

• P55 = 6,070 forms – used by claimants when the payment didn’t use up the pension pot and individuals aren’t taking regular payments. It can only be used if a pension provider can’t refund you.
• P53Z = 3,408 forms – used by claimants where the payment used up your pension pot and you have other taxable income.
• P50Z = 1,098 forms – used by claimants if the payment used up your pension pot and you have no other income in the tax year.

Why are people overcharged in the first please?

Pensions freedoms rules allow anyone over the age of 55 unfettered access to their pension pots with the first 25% tax-free.

When someone takes their first flexible withdrawal from their pension, providers apply tax on a ‘month 1’ basis so the withdrawal is counted as if that same amount of money will be taken every month during the financial year, rather than viewing it as a one-off withdrawal.

As a result, this ‘emergency tax’ is usually calculated on a much higher annual withdrawal than the pension saver actually takes.

Steve Webb, Royal London’s director of policy, said the only thing retirees can do to get round this it to make a relatively ‘nominal’ withdrawal – eg £1,000 or (if your scheme will allow you) less – and this will trigger the generation of a ‘regular’ tax code which means subsequent withdrawals should be taxed at a lower rate.

He added that for pension withdrawals, simply withdrawing 20% tax from everyone and then having the amount “tidied up at the year end” would be his preference to deal with the issue.

Overtaxed? How to reclaim your money

If you’ve been overcharged tax on your defined contribution pension, you may need to fill in one of the three claims forms (as above) which can be found on the government’s ‘Claim a tax refund’ page.

Or it is possible that your pension provider may pay you back automatically.

Otherwise HMRC may post you a P800 tax calculation, usually by the end of September where you may be able to claim online or it will send you a cheque.

Webb said: “It is outrageous that in just three months HMRC has over-taxed people by more than £26m. It cannot be acceptable to take thousands of pounds per person in excess taxes and then expect people to have to claim that money back. The rules need to be changed so that only basic rate tax is deducted and any extra tax due is collected through the normal tax return process. This would be a far fairer system”.