You are here: Home - Retirement - Retirement planning - News -

Retirees using pension freedoms reclaim £26m in overpaid tax

Written by: Paloma Kubiak
People aged 55+ taking advantage of pensions freedoms have reclaimed more than £26m in overpaid tax, figures reveal.

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”.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Insurance Experts: Are you fully insured? Click here to get a quote.

For a free quote or to speak with an insurance expert call 0800 1218744

Why now is a good time to buy an annuity

Annuities are ‘back on the table’ after two years of rock bottom rates, according to Hargreaves Lansdown.

Short-term lender offers 0% interest loans to members

A lender offering interest-free loans in return for a membership fee has launched this month, giving people in...

Should you go private rather than make an insurance claim?

If you’ve experienced a minor bump with another driver, you may be tempted to settle the costs privately witho...

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

A quick guide to guarantor loans – in association with Guarantor Loan Comparison

Considering a guarantor loan or becoming a guarantor yourself? Read our essential guide...

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week. Awards 2018

Now in their 21st year, our awards recognise the companies offering the best products and services to consumers

Money Tips of the Week

Read previous post:
How to pay care home fees

Putting a relative into care is never an easy decision, but these steps should minimise the financial impact.