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Thousands of savers who overpaid tax on pension withdrawals were repaid £38mn in the final quarter of last year, according to new data which prompted calls for reform of “unacceptable” tax rules.
In the three months until the end of December last year, a total of £38.8mn was repaid to around 13,000 claimants who had overpaid tax when first accessing their pensions, according to new data from HM Revenue & Customs.
The issue of overpaying tax affects over-55s accessing a defined contribution pension for the first time.
Usually when someone starts to access their pension savings, they can normally take a quarter of the money tax free, with any further withdrawals from the pension treated like income and subject to tax.
Since 2015, tax authorities have chosen to tax the first “flexible” withdrawal a saver takes from their pension on an “emergency” tax code basis. This means they do not take into account any tax already paid by the individual throughout the year. The arrangement has resulted in shock tax bills for those unaware of the tax quirk.
AJ Bell, an investment broker, estimates that since 2015 around £1.2bn has been repaid to savers who were overtaxed on their first withdrawal and had to fill out a relevant HMRC tax form to get their money back. The average amount repaid in the fourth quarter of last year was around £3,200, it said.
“It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact that Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds,” said Tom Selby, director of public policy at AJ Bell.
The total amount of taxable payments withdrawn flexibly from pensions since so-called pension freedoms were introduced in 2015 has exceeded £72.2bn, HMRC said in an update last September.
Getting your money back on overpaid tax requires individuals to fill out a form: choosing the right form depends on how the cash was accessed from a pension pot.
Provided the form is correctly filled out, HMRC says savers should receive a refund of any overpaid tax within 30 days.
HMRC said: “Nobody overpays tax as a result of taking advantage of pension flexibility.
“We will automatically repay anyone who pays too much because they’re on an emergency tax code. Individuals can claim back any overpayment earlier if they wish.”
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