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No HMRC rethink on taxation of pension withdrawals

10 July 2018

HMRC has come under fire for refusing to re-think its stance on the taxation of pension freedoms withdrawals.

Under existing rules, providers are required to charge “Month 1” emergency tax the first time someone accesses their retirement pot under the pension freedoms. This means people who make a single flexible withdrawal from their fund in a tax year receive 1/12th of their usual tax allowances.

In its recent newsletter, HMRC said after reviewing the current process, it felt making changes “would not significantly improve the tax position for the majority of recipients of a flexible drawdown payment” when compared with the existing system.

It stated: “The existing PAYE treatment of flexible pension drawdowns remains the most effective method of deducting tax in these cases and it reduces the risk of underpayments of tax arising.”

However, AJ Bell called the decision “deeply frustrating” and a “bitter blow” to savers. The pension provider has argued that if the decision is not reversed, it could push people into financial difficulty.

Senior analyst Tom Selby said: “This is a disappointing stance from HMRC when you consider that people withdrawing their pension have been overtaxed by hundreds of millions of pounds over the past few years. While almost £300 million has been repaid to savers since the pension freedoms were introduced, many more who didn’t fill out the required forms will have been left short-changed for up to a year.”

He added: “By continuing to overtax people who use the pension freedoms, HMRC risks pushing people into financial difficulty and forcing them to take out more than they need to, potentially creating an extra tax liability as a result. HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating. At the very least, we need a public consultation on HMRC’s approach to determine whether the current approach can be improved for the benefit of savers.”