HMRC has repaid more than £42m in pension tax overpayment refunds in January to March 2024 after the incorrect amount of tax was charged on pension income.
More than 13,000 reclaim forms were processed during the quarter, with an average reclaim of £3,167, according to Government figures.
The 2023/24 tax year saw more than £198m repaid to overtaxed pension savers – the highest on record. More than £1.2bn has now been reclaimed by people overtaxed on pension withdrawals since 2015.
Why are savers overtaxed on pension withdrawals?
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘month 1’ basis.
This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal. This often lands savers with shock tax bills frequently running into thousands of pounds.
While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket.
How to get your money back if you are overtaxed
If you are taking a steady stream of income via drawdown then you shouldn’t need to take any action, as HMRC will adjust your tax code to ensure that, over the course of the year, you are taxed the correct amount.
However, if you make a single withdrawal, then you will either need to fill out one of three forms or rely on HMRC putting you in the correct position at the end of the tax year.
Which form you need to fill out will depend on how you have accessed your retirement pot.
Provided you fill out the correct form, HMRC says you should receive a refund of any overpaid tax within 30 days.
What the experts say
Tom Selby, director of public policy at AJ Bell, said: “The latest official figures reveal over £1.2bn has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back. In the 2023/24 tax year alone, a record £198m was repaid to people who had been clobbered with an unfair – and often unexpected – tax bill.
“Depressingly, the true over-taxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.
“It is simply unacceptable that the Government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach [that] hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.”
“One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big over-taxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.
“Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days. If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”
Related: Stamp duty and capital gains tax receipts fall but inheritance tax hits record high
