Retirees over-taxed by £44m when taking money from pensions
The figure is almost double the amount paid at the beginning of this year and brings the total tax overpayments repaid to savers to £794m since the introduction of pension freedoms in 2015.
HMRC released the figures as part of its latest Pension Schemes Newsletter. Experts say the statistics shine a light on the extent of the problem of people overpaying tax when they simply want to access their pension savings.
When people access their pensions flexibility for the first time, the emergency rate of tax is applied as pension providers often won’t have individuals’ up-to-date tax codes on file. Under emergency tax codes, the amount withdrawn is treated as if it will continued to be paid each month, although in many cases it’ll actually only be a one-off payment.
Those affected must fill out one of three forms to claim their refund or else wait until the end of the tax year for a rebate.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown: “People drawing money from their pensions have been overcharged an eye-watering £44m. And this isn’t some kind of horrible mistake by the taxman, it’s how the system is intended to work.
“Today’s figures show HMRC has paid out yet another whopping sum to people who were over-taxed when accessing their pensions. The problem is that people pay tax on lump sums as if they were going to keep drawing them for the rest of the tax year. They then either need to apply for a refund or wait to the end of the tax year.”
Kate Smith, head of pensions at Aegon, said: “Overpaid tax can be recovered easily by adjustments to the individuals’ tax code for future income payments. HMRC will issue a new tax code to the pension provider which can be applied to future pension payments. This works well if the individual is taking a regular income, but not if they are taking a one-off lump sum.
“In this situation, they have two ways of reclaiming the overpaid tax. They can either wait until the end of the tax year when a refund will be made. Or they can reclaim the overpaid amount during the tax year using a HMRC claim form. If the overpaid amount is substantial, this may well be their preferred route, as they get the amount in their bank account quicker.
“As it looks as though HMRC has little appetite for addressing this convoluted way of overpaying then reclaiming tax, individuals should consider taking out a tiny first pension payment, then taking out a second higher payment in the same tax year, where the amount of income tax will be adjusted. This will circumvent having to make a tax reclaim and means individuals will have more money in their pockets quicker.”