‘Emergency tax’ applied to pension pots by HMRC eats away at retirement savings.
HM Revenue & Customs (HMRC) has refunded over half a billion pounds in overpaid pensions tax since the pension freedoms were introduced in 2015, according to new data.
The rules were designed to give people more flexibility to control their pension income by allowing over 55s to withdraw money from their pension pots when they wanted.
Over £32m was paid back to pension savers in the final three months of 2019 alone.
More than 10,000 people made an application to claim back their pension from HMRC during this period.
The average sum repaid was £3,115.
A total of 231,791 pensions tax refunds claims have been made since the pension freedoms came into effect.
This number only represents the number of people who have claimed. The total number savers overcharged remains unknown.
Why are pensions being overtaxed?
Under the new pension freedom rules, people aged 55 and over can withdraw the first 25% of their pension tax-free.
After this, income tax is applied to the remaining 75% of their pot.
Unless your pension provider holds an up-to-date tax code, an ‘emergency tax code’ will be applied to your first lump sum withdrawal.
An emergency tax code treats the lump sum being withdrawn as though it will continue to be paid each month. This is often referred to as a ‘Month 1’ basis.
For example, if you make a £10,000 withdrawal you could end up being taxed as though your annual income is £120,000.
How to claim back overtaxed pension
I you think you HMRC has charged you too much pensions tax, you’ll need to fill out one of three claims forms which can be found on the government’s claim a tax refund page.
If you haven’t withdrawn your entire pension pot and are not taking out regular payments, you’ll need to fill out a P55 form.
HMRC received 5,759 claims from savers in the final quarter of 2019.
A P53Z form should be filled out if you have withdrawn your entire pension pot and also receive other taxable income. A total of 3,422 claims were made.
If you have drawn down your entire pension pot but have no other taxable income you’ll need to fill out the P507 form.
This type of claim usually receives the fewest number of applications and only 1,154 were made during the final quarter of 2019.