HM Revenue and Customs paid back over £38 million to pension savers who made flexible withdrawals from their pension pots in the last three months of 2023.
Ten years after the flexible pensions rules were introduced by the Government in the 2014 Budget, this has been dubbed arcane and unacceptable.
Between 1 October 2023 and 31 December 2023, HMRC processed over 12,000 reclaim forms, with an average reclaim of £3,216.
In total, nearly £1.2 billion has been reclaimed by people overtaxed on pension withdrawals since the pension freedoms were introduced in 2015.
AJ Bell said that despite the reforms being widely welcomed by savers, the government’s own tax systems remain “stuck in the dark ages.”
Tom Selby, director of public policy at AJ Bell, said: “Almost £1.2 billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back. 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 hailed the government’s inability to adapt the tax system in line with the rules as “unacceptable,” blasting the government for persisting with an “arcane approach which hits people with an unfair tax bill, often running into thousands of pounds.”
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis. This means HMRC divides the usual tax allowances by 12 and applies them to the withdrawal, often landing savers with an unexpected tax bill.
One way advisers can help clients who are planning to take a single withdrawal in a tax year avoid a hefty tax bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.
Alternatively, clients can fill out one of three HMRC forms, which should see tax returned within 30 days.
