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Pension freedoms users reclaim £22m in overpaid tax

Paloma Kubiak
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Paloma Kubiak

The ‘over-pay then reclaim’ system on pension freedoms withdrawals has seen people claw back more than £22m from HMRC in the first three months of the year.

Statistics for 1 January to 31 March 2018 revealed HMRC repaid a total of £22.5m in overcharged tax, wrongly applied when people exercise their pension freedoms to withdraw money from pension pots.

In total, more than 10,000 pension savers submitted reclaim forms in the three month period with the average tax reclaim standing at £2,100.

Since the dawn of pension freedoms in April 2015, a staggering £300m has now been repaid to savers being overtaxed.

However, as the HMRC statistics only capture the total repaid from people who have actively reclaimed their money, the true figure could be much higher.

Why are savers overtaxed in the first place?

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

When someone takes their first flexible withdrawal from their pension, providers apply tax on a ‘month one’ 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. As such, an excessive tax deduction is made which then has to be reclaimed.

Reclaim your money

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

  • P55 – when the payment didn’t use up the pension pot and you aren’t taking regular payments. HMRC received 6,218 claims in Q1 2018.
  • P53Z – where the payment used up your pension pot and you have other taxable income. HMRC received 3,448 claims.
  • P50Z – if the payment used up your pension pot and you have no other income in the tax year. HMRC received 988 claims.

Or it’s possible 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.

‘End the absurd tax and reclaim system on pensions’

Royal London director of policy, Steve Webb, is calling for reform to the way pension withdrawals are taxed.

He said: “These figures are a regular reminder of the absurd way in which pension withdrawals are taxed. HMRC is perfectly happy to over-tax tens of thousands of people each year and make them jump through hoops, having to choose between three different forms to complete and then wait to get their money back. This is a system run for the convenience of HMRC, not the taxpayer. It is time to move to a simple system where basic rate tax is withdrawn at source and any adjustment is made through end year tax returns.”

An HMRC spokesperson, said: “Claimants presenting their 2018/19 P45 to their pension provider will pay the correct tax. In the event they don’t, any discrepancy will be settled within 30 days of HMRC being notified.”

They added that Royal London’s suggestion of basic rate tax charges followed by adjustments made through tax returns would involve pushing people into self-assessment, leaving taxpayers with large unexpected tax bills at the end of the year.