The taxman has pledged to end the scandal of inflated tax charges on pensions.
As many as 470,000 people have lost vital income totalling £1.37 billion, which then had to be reclaimed, because of flaws in the HMRC tax collection system.
The problem centres on the fact that the HMRC has routinely imposed a high emergency tax rate on money taken out of a pension when people first retire.
This rate is not based on an accurate assessment of an indvidual’s income and can see them taxed at 40 percent rather than 20 percent. It is then left up to the pensioner to claim back the tax that has been overcharged.
The problems date back to a new pensions freedom regime introduced in 2015. Since then, over 470,000 claims have been made for refunds totaling £1.37bn via the HMRC system.
Now, the department has announced that it will move much more quickly to replace these emergency tax codes with regular ones which will make sure the correct amount of tax is deducted in real time.
Former pensions minister Sir Steve Webb said the decision is a “victory” for the many people who were impacted and had to “jump through hoops” to claim their own money back.
He said: “It is great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system.
“This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax.
“The tax system is complex enough as it is, and this change should hopefully reduce the complications which pension savers face when they try to access their hard-earned cash.”
Details of the change were buried by the HMRC buried in their latest Pension Schemes newsletter, in an article titled “Helping Customers Get On The Right Pension Pay Faster”.
It read: “From April 2025, we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset.
“We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code – this means they’ll avoid an overpayment or underpayment at the end of the year.
“There is no need to contact HMRC and once a tax code has been changed, we’ll inform customers by letter or digitally if they’ve signed up for paperless in the HMRC app or online.”
Pensioners reclaimed £50m in overtaxation on pension withdrawals in October, November and December, figures in the newsletter revealed.
More than 14,000 reclaim forms were processed during the quarter, with an average reclaim of £3,389.
Myron Jobson, a senior personal finance analyst at interactive investor, welcomed the change, calling it “a significant step forward in simplifying what can often be a confusing process”.
He added: “For too long, pensioners have borne the brunt of systemic inefficiencies, with many unknowingly overpaying tax and waiting months for refunds.
“This change not only ensures that pensioners are taxed more accurately in real time but also reduces the financial and emotional stress of overpayment.”
Tom Selby, director of public policy at AJ Bell, said these figures are likely only “the tip of the iceberg” because it only captures those who fill in the relevant HMRC reclaim form.
He said: “In reality lots of people, such as those on lower incomes who are less familiar with the self-assessment system, will not go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.”
Mr Selby the regime that has been in place since 2015 has been “simply unacceptable”.
