A record £1.2 billion has been reclaimed by people overtaxed on pension withdrawals, after savers clawed back over £198 million in the 2023/2024 tax year alone, which is an “unacceptable” situation, say commentators.
According to HMRC, savers reclaimed over £42 million in overtaxation on pension withdrawals in January, February and March 2023, with over 13,000 reclaim forms processed during the quarter.
Tom Selby, director of public policy at AJ Bell, said: “A decade on from former Chancellor George Osborne’s bombshell pension freedoms and the tax system which governs flexible retirement withdrawals remains faulty.
“In the 2023/24 tax year alone, a record £198 million was repaid to people who had been clobbered with an unfair and often unexpected tax bill. Depressingly, the true overtaxation number will likely be substantially higher. In particular, 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.”
Selby said it is “simply unacceptable” that the government has failed to adapt the tax system to cope with the freedoms, instead relying on an “arcane approach”. Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis, meaning HMRC divides usual tax allowances by 12 and applies them to the withdrawal.
AJ Bell said to overcome the risk of a large tax bill, pension savers should take a notional withdrawal first so that HMRC is able to apply the correct tax code to the second, larger withdrawal. Alternatively, pension savers can get their money back within 30 days if they fill out one of three HMRC forms to reclaim their money. If not, savers will need to rely on the efficiency of HMRC to repay them at the end of the tax year.
