Commentators lament HMRC’s position of ‘tax first – ask questions later’, as government repays a total of £22.3 million in the first quarter of this year to individuals who overpaid tax when accessing their pension. But there is a way around it.
This figure equates to an average of £3,011 per saver as a result of the incorrect amount of tax being charged from pension income.
When someone accesses their pension flexibly, they are taxed on a ‘Month 1’ basis which means they are treated as receiving that sum every month, resulting in many people overpaying tax. To reclaim overpaid tax, pension customers need to fill in a form.
The pensions schemes newsletter revealed that HM Revenue & Customs processed 4,693 P55 forms, 1,903 P53Z forms and 86 P50Z forms between 1 January and 31 March.
Jon Greer, head of retirement policy at Quilter, said: “This emergency tax is due to a little understood quirk of the PAYE system when people start to take money from their pension. While HMRC will make a repayment automatically, it could take some time so it is best to make a repayment claim yourself to avoid waiting.”
Pension experts have called on the Government to simplify the system to avoid more people unwittingly falling into the tax pitfall in the future.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “Pension Freedoms have been in place for several years now and the issue of overpaid tax has always been a problem, yet we continue to see thousands of people overpaying by hundreds of millions of pounds every year. There must be an easier way for people to be able to access their hard-earned pension cash without being clobbered by tax that they then need to work out how to reclaim. It’s a real fly in the ointment of the Pension Freedoms that have been embraced by society.
“Pension freedoms are embedded into the retirement landscape now and it is time the system was reformed to reflect changed behaviours and make it easier for people to access their pensions.”
Andrew Tully, technical director at Canada Life, commented: “The latest HMRC numbers just re-emphasise how complex the tax position around pension withdrawals is. Seven years on from the introduction of the pension freedoms there must be a better way to administer the tax position around pension withdrawals which would mean HMRC is not processing refunds of over £22m in just a three month period.
“But perhaps HMRC has adopted the view that it is better to tax first and ask questions after.”
Tully says customers making a pension withdrawal for the first time can workaround the rule by initiating a small withdrawal of around £100, which will generate a tax code from HMRC which the pension provider will apply to any subsequence withdrawals. This will result in the tax being taken at source being far more accurate in many more cases, reducing the paperwork and ensuring the customer receives a more accurate withdrawal.
