Tens of thousands of people have claimed their money back
(Image: Alamy/PA)
Thousands of pensioners have successfully reclaimed more than £10,000 after being overcharged tax on their pension withdrawals, new analysis shows. A small number of people across the UK secured refunds exceeding £100,000.
The HMRC data, obtained by Royal London via a freedom of information (FOI) request, demonstrates a rise in the volume of refunds claimed during 2023-24. Pension freedoms, introduced in 2015, provided those aged over 55 with various choices regarding how to utilise their defined contribution (DC) pension pot.
Typically, individuals can withdraw up to 25% of their pension as a tax-free lump sum, whilst the remaining 75% faces taxation as income. However, an “emergency” rate gets applied to pension withdrawals, with HMRC presuming it represents the pensioner’s monthly earnings for the remainder of the tax year.
This results in potential overcharging when people make one-off withdrawals. Approximately 60,000 pension savers secured refunds during the 2023-24 tax year, representing a 20% increase from roughly 50,000 the preceding year, Royal London’s figures demonstrated.
Around 11,700 pensioners reclaimed £5,000 or more, including 2,400 who received refunds surpassing £10,000.
The typical refund totalled £3,342, marking an increase of £280, or 9%, compared to 2022-23.
The highest 25 refunds averaged £106,900, the data indicated. Clare Moffat, pension expert at Royal London, said: “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.
“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.”
From April, HMRC altered its procedure so that tax codes are automatically refreshed for people newly accessing their private pension.
Ms Moffat said the Government’s ruling that untouched pension funds will face inheritance tax from 2027 means “more and more people are considering dipping into their pension pots while they are alive” to make substantial lifetime gifts to family members.
Pensions are presently free from inheritance tax so are viewed as a tax-efficient method of transferring wealth.
She said: “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.”
Approximately £1.4bn has been repaid since 2015, the data showed.
An HMRC spokesperson said: “Ultimately, nobody overpays tax as a result of taking advantage of pension flexibility.
“We will repay anyone who pays too much because they’re on an emergency tax code and individuals can claim a repayment much earlier if they wish.”