HM Revenue & Customs paid out almost £57 million in over-taxation on pension withdrawals in April, May and June, as the government’s “outdated approach to taxation” continued to hit savers, say industry experts.
New figures have revealed that more than 16,000 claim forms were processed in the second quarter of this year, with a total of £56,925,219 repaid to pension savers.
The average tax refund also climbed to £3,540, up by almost £400 compared to the first three months of the year and the third highest figure on record.
In total, almost £1.3 billion has been repaid to pension savers since the pension freedoms were introduced in 2015.
Jon Greer, head of retirement policy at Quilter, said: “These figures show there is a growing issue given this huge amount of money is being repaid as a result of the incorrect amount of tax being charged on pension income.
“The rising number of claimants represents a large amount of people being over-taxed and waiting unnecessarily for their funds due to a clunky system that is in much need of reform. There is a major flaw within the PAYE system in that, while it works for regular income, the way pensions can be taken does not align with the system’s design and as a result, retirees have been heavily impacted since pension freedoms were introduced in 2015.”
Currently, HMRC taxes the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis, meaning HMRC divides their usual tax allowances by 12 and applies them to the withdrawal. While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, those who make a single withdrawal will likely be left out of pocket.
Tom Selby, director of public policy at AJ Bell, commented: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers. The true overtaxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment system 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.
“It is simply unacceptable that, almost a decade on from the introduction of the pension freedoms, the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, echoed the sentiment.
“More than nine years after pension freedoms it is inconceivable to think that people are still being overtaxed on their first pension withdrawals. Many of these people will not have been expecting this, and will have had a nasty shock when their tax bill was way higher than expected. This can cause them huge problems: a tax nightmare is not the way to start your retirement.
“Of course, you can get a refund, either by waiting until the end of the tax year or filling in one of a number of forms, but this is a complication many people do not need and it’s a situation that should have been resolved years ago.”
One way savers planning to take a single withdrawal in a tax year can potentially avoid a large overtaxation bill is by taking a notional withdrawal first, which should allow HMRC to apply the correct tax code to the second, larger withdrawal.
