HMRC repaid £134m in tax that was charged on pension withdrawals last year.
Although this figure is slightly down on the £142m repaid the year before, this high number shows that pension withdrawals continue to be overtaxed following the introduction of the pension freedom rules.
Since these rules were introduced HMRC has refunded £970m it has taken in ‘emergency’ tax payments, with this figure expected to pass £1bn this year.
In most cases when people access their pension for the first time this generates an emergency tax code, with HMRC assuming the same amount will be taken each month. If this is just a one-off payment this can lead to people paying more tax than is necessary.
Figures published by HRMC show that more than £45m was repaid to 14,335 people who were overtaxed on pension withdrawals in October, November and December last year. This is the highest Q4 figure on record and suggests more people are taking a lump sum from pension funds to plug income shortfalls as the cost of living crisis hits.
These figures have led to calls for the government to simply the taxation of pensions to stop people being overcharged tax.
AJ Bell head of retirement policy Tom Selby says: “As surging inflation eats into people’s spending power, there is mounting evidence savers are turning to their retirement pots to make ends meet. We already know flexible pension withdrawals spiked in the early part of 2022, with £3.6 billion of retirement money accessed between 1 April and 30 June 2022 – a 23 per cent increase compared to the same period in 2021.
“This is now filtering through into pensions overtaxation figures, with a staggering £45m repaid to savers in the final three months of 2022 – the highest Q4 figure on record and third highest since the pension freedoms were introduced in April 2015.
“Depressingly, the true scale of the issue is likely much higher as many of those who have been overtaxed – in particular, people on lower incomes who are less familiar with the self-assessment process – will not go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting them right.
“It is ridiculous the tax system operates in this way and scandalous that the Government has done nothing to address it almost eight years since the pension freedoms were introduced.”
Canada Life technical director Andrew Tully adds: “The latest HMRC numbers just re-emphasise the complexity of the tax position for those taking lump sums out of their pension. There must be a better way to administer the tax position around pension withdrawals which would mean HMRC is not processing refunds of over £40m in just a three month period, and close to £1 billion since 2015.”
Tully adds that a useful workaround for customers making a pension withdrawal for the first time is to initiate a small withdrawal of say £100. That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals. He says this will mean the tax taken at source is far more accurate in many cases. He says not only will this reduce paperwork for members but ensure people receive a higher and more accurate withdrawal from their savings.
Quilter head of retirement policy Jon Greer adds: “The confusing nature of our pension taxation system has once again resulted in HMRC having to pay up in tax overpayments. Today’s figures show £134m was repaid to savers in 2022 in overcharged tax. This works out at an average of £3,215 per claim made.”
Greer points out that HMRC will make repayments if it has overcharged on tax when people file their self-assessment forms, although in some cases this can mean a wait of months before savers get their money back. He adds: “It’s possible to make an ‘in year’ reclaim from HMRC taking five to six weeks.”
He says: “Many people take the lump sum option because they may need the funds to cover a one-time expense or financial emergency, and this adds further difficulties to the situation.
“Particularly in a time of cost-of-living pressures, a solution to this clunky quirk needs to be found as right now the burden is being unduly placed on savers to not only recognise they are out of pocket, but then require them to fill out paperwork if they want their money back immediately.”
