‘Emergency tax’ applied to pension pots by HMRC hits retirement savings
HM Revenue & Customs (HMRC) has refunded more than half a billion pounds in overpaid tax to retirees since the pension freedoms were introduced in 2015, according to new data.
Pension freedoms were designed to give people more flexibility to control their retirement income by allowing over-55s to withdraw money from their defined contribution pension pots when they wanted.
But the taxman has overcharged pensioners by £600.4 million on these withdrawals, and has been refunding it to people who make claims.
Almost £33m was paid back to pension savers in the first three months of 2020 alone, and more than 10,000 people made an application to claim back this cash from HMRC in this period.
The average sum repaid was £3,141.23.
A total of 242,188 pensions tax refunds claims have been made since the pension freedoms came into effect.
These figures only represent the number of people who have made claims themselves. The total number of savers overcharged is 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An emergency tax code treats the lump sum being withdrawn as though it will continue to be paid each month.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 will need to fill out one of the following three claims forms which can be found on the government’s claim a tax refund page.
If you have not withdrawn your entire pension pot and are not taking out regular payments, you will need to fill out a P55 form.
HMRC received 6,286 of these claims from savers in the first quarter of 2020.
A P53Z form should be filled out if you have withdrawn your entire pension pot and also receive other taxable income. A total of 2,973 claims were made in the first three months of this year.
If you have drawn down your entire pension pot but have no other taxable income you will need to fill out the P507 form.
Only 1,138 of these were made during the first quarter of 2020.
I still work and I could have retired at 64 and 6 months and I am crippled by tax and free pay on my small work pensions and gov pension after paying tax since I was 13 years old I think I am paying twice to earn money to survive.