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HMRC tax take on pension withdrawals a ‘scandal’

5 August 2019

HMRC figures that show £480m has had to be reclaimed since 2015 have been dubbed ‘unacceptable’ and an ‘over-taxation scandal’

Quarterly figures published by HMRC in their August Pension Schemes Newsletter reveal that the number of people being over-taxed when taking money from their pension reached record levels. More than 17,000 people reclaimed £46m in tax from April-June 2019, compared with 14,000 people claiming back £29m a year earlier.

Since ‘pension freedoms’ were introduced in 2015, more people have been able to take lump sums out of their pension fund as and when they wish.

But these lump sums are often over-taxed on an ‘emergency’ basis, with taxpayers having to fill in one of three different forms to claim back the excess tax.

The total amount which taxpayers have had to claim back is now around £480m and is expected to pass the half a billion pound mark in the next quarter.

Steve Webb, director of policy and external communications at Royal London said: “It is a scandal that people who are legitimately accessing their own money, using freedoms given to them by the government, are routinely being over-taxed for the convenience of HMRC.

“Thousands of people every month are having to fill in complex paperwork to recover tax they should never have had to pay.  The latest figures show that this problem is now reaching epidemic proportions, with nearly half a billion pounds having to prised out of HMRC’s hands and returned to its rightful owner.  The new Chancellor needs to address this issue as a matter of urgency.”

AJ Bell likewise pointed to the latest figures as exposing “the damage caused by HMRC’s insistence on overtaxing savers when they first take taxable income from their pension using the retirement freedoms”.

Senior analyst Tom Selby said: “The near £500million reclaimed through official forms is just a small part of the picture, however, with the vast majority who don’t jump through these Government-imposed hoops potentially having to wait until the end of the tax year to get their money back.

“It is incredible that more than four years on from the introduction of the pension freedoms we still have not had any public consultation on HMRC’s approach to taxing withdrawals.”

Selby added that while the Government clearly had other priorities at the moment, “it is unacceptable that this issue, which affects every person who accesses their fund for the first time, has been ignored.

“We know the current approach is causing huge confusion and in some cases financial hurt to people. The politicians who introduced the pension freedoms now need to take responsibility for making the tax system work for those utilising the flexibilities.”

Stephen Lowe, group communications director at Just Group, added that the figures released by HMRC are not complete.

“Billions of pounds of tax free cash payments are not included in these figures nor are many other pension withdrawals, such as small pot withdrawals or purchases of guaranteed income for life solutions. On top of this, the figures don’t tell us how much individuals have withdrawn or how often.

“More than four years on from the introduction of pension freedoms we still do not have anywhere approaching complete information on how these reforms are influencing the retirement outcomes of millions of people.

“In the absence of any meaningful data it’s absolutely essential that the FCA prioritises the challenge the government has set it to ensure everyone receives independent and impartial guidance before accessing their pension savings – making sure that choosing not to take guidance is an active, rather than a passive, choice.”

The table below (provided by Royal London), shows all the quarterly data since the series began. The first three columns are for the three different forms which can be used to claim back overpaid  tax and show the number of such forms returned each quarter.  The remaining columns show the amount repaid and the total number of forms submitted.

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