Hundreds and thousands of pensioners have paid more in tax than they actually owe. HMRC has processed around 15,800 tax refund claims for those who accessed their pensions early, new figures from HMRC have shown.
Since the new reforms were introduced in 2015, people who have flexibly withdrawn their pension savings have collectively overpaid more than £1billion.
This had led to hundreds of thousands of pensioners overpaying their tax by £3,000, new data shows.
Steve Webb, a former pensions minister and now a partner at consultants LCP has slammed this error as “an absolute disgrace”.
The overpayment is due to the issuing of emergency tax codes.
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Instead of a normal tax, some pensioners have been given the emergency tax rate by HMRC as if individuals pull out the amount from their pot every month.
The emergency tax code means thousands have paid thousands of pounds more in tax than they actually owe, which they then need to claim back.
For example, if someone pulls out £10,000 from their pension pot one month, HMRC taxes them as if they will be taking out £120,000 that year.
Mr Webb said: “This is an absolute disgrace. A system based on systematic over-taxing of pension savers cannot be right.
“There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place.”
The changes to the pension system in 2015 meant people were able to withdraw some of their defined contribution pension savings as an income from age 55 while leaving the rest of their money invested.
As a result, some people are charged at an emergency tax rate paying thousands of pounds more in tax than they owe.
The latest figures show that between January and March this year, HMRC processed 15,800 tax refund claims to people who accessed their pensions early.
The amount refunded by HMRC totalled £48.5million over the same three-month period.
How to reclaim overpaid tax from HMRC
Britons must complete one of three return forms from HMRC.
People either have to make a claim themselves or wait for HMRC to review the self-assessment payments and then issue a refund.
Any money owed should be returned within 30 days. For more information on which of the three people can fill out, they can find it on their website.
An annual tax bill will be recorded at the end of the year by the tax authority as part of its standard reconciliation exercise.
Mr Webb added: “Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury.”
An HMRC spokesperson 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.”
