A handful of savers have reclaimed more than £100,000 in tax, wrongly charged on pension withdrawals according to figures from HMRC.
The data on the size of these overpayments was supplied via a freedom of information request from Royal London. These figures relate to repayments made in the 2023/24 tax year.
It found that around 2,400 pension savers reclaimed more than £10,000 each in these emergency tax payment — a 4 per cent increase of the numbers claiming sums of these size the previous year.
The data also showed that 11,700 pension savers claimed back £5,000 or more, an increase of 21 per cent on the previous year.
Overall the average refund per saver was £3,342, —up £280 on the previous year, with many pension savers often having to wait to get the money back. The average value of the top 25 refunds stood at £106,897.
In total, around 60,000 investors claimed refunds in 2023-24 compared with approximately 50,000 the year previous, an increase of 20 per cent.
These emergency tax payments are typically applied when people access their pensions flexibly for the first time. Many people will be looking to take a one-off payment, but HMRC’s systems will apply a code that assumes they will be taking this sum monthly for the rest of the tax year.
HMRC is promising quicker refunds in 2024/25 but emergency taxes still remain.
Royal London pension expert Clare Moffat says: “It’s incredible to think that some people withdrawing from their pension for the first time were entitled to emergency tax refunds in excess of £100,000.
“Not only do these taxes usually come as a massive shock, the unexpected tax amount can also scupper people’s carefully laid plans.
“The data relating to those who paid more than £100,000 in emergency taxes will likely have included some people looking to fund home purchases, either for themselves or for a loved one. To trigger a tax bill of that size, they will have made a withdrawal in excess of £300,000.
“HMRC recently announced an overhaul of its emergency taxing codes on pensions, which it promises will deliver quicker refunds, but that doesn’t mean people won’t still be charged the higher rate in the first place.
“In fact, the recent announcement by the government that pensions will soon be subject to inheritance tax may have the knock-on effect of triggering a surge in emergency taxes on pension withdrawals.
“Looming inheritance tax means more and more people are considering dipping into their pension pots while they are alive for the purpose of making large lifetime gifts to loved ones, which are exempt from inheritance tax if the giver survives for seven-years after making the gift.
“A rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals. So, the problem of emergency taxes isn’t going away, and there’s a chance it could get worse.”
To get the money back, retirees must complete one of three forms before waiting on a refund. Approximately, £1.4billion has been refunded since 2015.
If they don’t fill out the paperwork, retirees will need to wait on HMRC reviewing the payments at the end of the tax year. In the past, this meant many were left out of pocket for many months.
One way people can avoid emergency taxes when taking money out of their pensions is by making a small initial withdrawal which will have the effect of triggering a less punitive tax code on future withdrawals. However, this would be less practical if a large sum was needed immediately.
Clare Moffat added: “The temptation is to make your first withdrawal a big one to splash out a little after years of careful saving. Unfortunately, that’s exactly how you end up paying a large chunk of your life savings in emergency tax.
“For those who’ve benefited from financial advice in planning their retirement, advisers will highlight the value of withdrawing a modest taxable amount. This helps ensure a more appropriate tax code is applied to future withdrawals—so you only pay the tax that’s due, rather than being hit with emergency tax you’d need to reclaim later.”