Retirees are being over-taxed at record levels as HMRC applies emergency tax codes to pension withdrawals
Over-55s have had to claim back some £480 million in overpaid taxes from the government since the launch of pension freedoms in 2015, new figures from HMRC reveal.
As many as 17,000 people had to claim £46 million in tax back between April and June, up from 14,000 people claiming £29 million in the same period in 2018.
Since pension freedoms were introduced in 2015 people have been able to withdraw lump sums from their pension pots. However, these withdrawals are often stung by emergency tax rates applied by HMRC, which have to be claimed back at a later date.
The total amount over-55s will have to claim back is expected to reach half a billion pounds in the next three months.
This figure has been described as a"drop in the ocean" as it only reflects the money people have actively claimed back from HMRC, while millions more sits until it is returned in rebates at the end of the tax year.
Steve Webb, director of policy at Royal London and former pensions minister, comments: "It remains 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."
People who have been over-taxed can claim the money back by filling out one of three different forms for HMRC. The vast majority however, do not do so and have to wait until the end of the tax year to receive a rebate.
Tom Selby, senior analyst at AJ Bell, comments: “These latest figures continue to expose the damage caused by HMRC’s insistence on overtaxing savers when they first take taxable income from their pension using the retirement freedoms.
“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."
Avoid getting stung
Over-55s that withdraw a lump sum from their pensions end up getting stung with an emergency tax rate because HMRC assumes they will be withdrawing that amount regularly, when in fact it is often just a one-off payment.
While savers owed tax are repaid, as Moira O’Neill, head of personal finance at interactive investor (Moneywise's parent company), notes: “Repayments can take a long time and the process can be a huge inconvenience.”
Ms O’Neill offers the following advice for savers: “It’s worth planning well ahead when getting ready to start taking pension income - think about requesting only a nominal payment in order to trigger a new tax code."
Your tax code will then be set at the level of the initial payment. Ms O'Neill adds: "You can then withdraw the sum you originally intended to.”
Fact-check next time!
Some misinformation and assumptions in the article that are just plain wrong.
"these withdrawals are often stung by emergency tax rates applied by HMRC, which have to be claimed back at a later date."
Wrong! The tax rates are applied by the pension scheme - HMRC are not consulted prior to the payment being processed, so there is no opportunity for HMRC to apply a tax code to that drawdown amount.
"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 "
"Over-55s that withdraw a lump sum from their pensions end up getting stung with an emergency tax rate because HMRC assumes they will be withdrawing that amount regularly, when in fact it is often just a one-off payment"
Again, both WRONG! When you take a pension drawdown amount, the pension scheme are unaware of what other income you are in receipt of, therefore they cannot possibly know what rate of tax you pay. As such, they treat the payment as if it is an additional source of income. This way, if it is indeed an additional source of income then it is highly likely that the correct tax would have been deducted. The alternative is to deduct nothing, which in the case where it is additional income and should be taxed, the recipient will end up with an unwelcome tax bill at the end of the year - by which point they may not have the funds to pay it. The current method ensures that at least some tax is paid, with any over-taxation being resolved end of year as normal, or in-year if the recipient is willing to submit the appropriate repayment claim form.
The tax code system employed by HMRC is only a provisional method of collecting tax during the year - it's not until the end of the year when the final amounts are confirmed that the actual tax liability can be calculated - anything prior to that is an estimate, albeit an informed one.
After 5 years since thigs was introduced why are Banks struggling to apply it? The Government does not inform us that a solicitor has to approve this transfer? and if it is over £15000 there are further complications. No wonder spouses are not claiming this.
Overtaxed on pension
Just took my pension & still working & hmrc halved my tax code to 756L, said I owe them another £500, but all my payments are still under the £50,000 threshold. Exactly as the article says, they say that they will adjust it until a rebate is issued, and that will be at the start of the next tax year.
Tax code change
Is this being done by HMRC just as they can.?
"Over-55s that withdraw a lump sum from their pensions end up getting stung with an emergency tax rate because HMRC assumes they will be withdrawing that amount regularly, when in fact it is often just a one-off payment."
How...does this even happen? Why 'assume'? Why not follow facts?
On the back of this I suspect many workers will have been routinely overtaxed for decades too. Every year is another fresh hell about how the HMRC gets it so badly wrong. I worry about how this organisation actually functions and how much of our money it has allowed to go 'off grid', as it were.
My money be refunded to my cash check / taka