Pension savers can withdraw money from their pots after they reach 55 thanks to pension freedoms introduced in 2015, but those who withdraw for the first time are in danger of being charged excessive amounts of tax at an ‘emergency rate’.
Here, Which? explains why HMRC is overcharging pension tax and how you can claim a refund if you've been affected.
How much has been overpaid?
A total of £61,305,602 was was repaid to people overtaxed on pension withdrawals from 1 July to 30 September this year, according to the latest data from HMRC. This is up £5m on the last quarter (when £56m was overpaid) and is nearly double the £33,088,782 repaid in the same period last year. The average value of money reclaimed was £3,252 and there were 18,851 claims processed in total.And this table shows the average reclaim and how many refunds were processed in each quarter.
Find out more:Why are pensions overtaxed?
The second is to take a lump sum from a pension drawdown plan. If you do this, 25% of your total pension savings is tax-free and any subsequent withdrawals are subject to income tax.
Your pension company collects the tax on your behalf, so the lump sum you get is paid net of tax. However, many people overpay tax the first time they withdraw from their pension. This is because your provider may not know what your tax code is or details of other income, if you have any.
This means you'll be taxed as though the lump sum you're withdrawing will be repeated every month. For instance, a £10,000 withdrawal could see you being taxed as though your annual income is £120,000. If this goes unnoticed, it can make an unnecessary dent in your pension pot.
Find out moreundefinedCalls for reform
The figures released by HMRC relate to the amounts repaid as a result of claims being submitted on either a P55, P53Z or P50Z form, and do not include repayments through coding adjustments.
This means the number of people overtaxed could be ‘substantially higher’, according to investment firm AJ Bell.
Tom Selby, head of retirement policy at AJ Bell, said in May: ‘People on lower incomes who are less familiar with the self-assessment process might be less likely to 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.’AJ Bell, along with the former pensions minister Sir Steve Webb, has urged the government to adapt the tax system so savers don’t need to fill in one of three forms to get their money back.
In response, a spokesman from 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.'
Find out more:Could you be owed a pension tax refund?
If you are taking a steady stream of income via drawdown, you shouldn’t need to take any action as HMRC should adjust your tax code to ensure you pay the correct amount over the course of the year.
However, if you make a single withdrawal, it’s important to check you haven’t paid more than you should.
How to claim your refund
If you've overpaid tax, you'll need to fill out one of three claims forms:
P55
P53Z
P50Z
If you don't want to use the government's online service, you can fill out a form on-screen, print it off and post it to HMRC, or print off and fill in a form by hand. HMRC says you should receive a refund of your overpaid tax within 30 days.
The article was first published on 7 May 2023 and was last updated on 27 October when HMRC released data relating to Q3 2023.
source https://www.which.co.uk/news/article/overpaid-pension-tax-are-you-owed-a-refund-aXVx03e59qLY