HM Revenue & Customs is still refunding millions of pounds back to Britons in overpaid pension tax.
It repaid £48.7million in overpaid pension tax between 1 April to 30 June, new data from HMRC shows.
There were 13,000 refund forms processed by HMRC in the period and the average refund came in at around £3,800.
Between January and March, HMRC refunded £44million in overpaid tax back to pension savers.
The total number of claims for overpaid tax on pension withdrawals has now gone over half a million since the introduction of Pension Freedoms in 2015.
People taking out a lump sum from their pension for the first time are at particular risk of overpaying too much tax as they can be taxed with an emergency tax code.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: ‘The overpaid pension tax saga continues to drag on.’
She said ‘these refunds amount to a significant chunk of change.’
Headache: Pension savers have to fill in a form for HMRC if they think they are owed a refund
What causes the problem?
People can access money from their pensions in two ways.
First, you can take a 25 per cent lump sum of your pension tax-free. The rest is charged at your normal income tax rate.
The second option is to take a lump sum from a pension drawdown plan. If you do this, 25 per cent of your total pension savings is tax-free and any subsequent withdrawals are subject to income tax.
The issue of overpaying tax on pension withdrawals often hits people who are taking a lump sum out of their pension for the first time.
Morrissey said: ‘They get taxed on what is known as a ‘month one’ basis, which means it’s treated as though the same amount will come out every month.
‘This results in a far bigger tax bill, which can come as an unpleasant surprise or even de-rail people’s retirement plans.’
Since pension freedom reforms were introduced in 2015, HMRC docks extra tax off any initial sum taken from a fund on the assumption it could be ‘month one’ of a series over the rest of a tax year.
In essence, HMRC assumes the pension lump sum you are withdrawing will be repeated every month.
Pension providers typically collect the tax on your behalf, meaning the lump sum you get is paid net of tax.
The pension provider may not know what an individual’s tax code is or have any details on their other sources of income. As a result, an emergency tax code is used on the withdrawal.
How can taxpayers get a refund?
Affected pension savers currently have to claim back their cash from HMRC themselves or wait until it is done after the end of the current tax year.
Morrissey said that while the overpaid tax can be reclaimed, ‘it’s an admin headache that people can well do without.’
She added: ‘Ten years on from the advent of freedom and choice it’s a process that should have been consigned to history.’
If you make a single lump sum pension withdrawal, check you have not paid more tax than you should.
You can apply for a tax refund online on HMRC’s website.
Morrissey said: ‘If you do get clobbered with a big tax bill, then you will need to fill out one of three forms so that HMRC can process the refund. Otherwise, you can wait until the end of the tax year.’
How can pension savers help themselves?
The pension saver tax saga is ongoing and should have been nipped in the bud years ago.
However, there are steps pension savers can take to mitigate the risk of overpaying tax.
Morrissey said: ‘You could make your first pension withdrawal a relatively small one.
‘However, if you were looking to take a lump sum to fund travel or home renovations, for instance, you would need to plan ahead to make sure the money you take isn’t whittled away by tax which could delay your plans.
Is HMRC doing anything about this?
After previously defending the system and insisting ‘nobody overpays as a result’, HMRC has vowed to put a stop to the practice of forcing pension savers to apply for tax refunds.
In a newsletter in January, HMRC said that from April it would move much more quickly to replace ’emergency’ tax codes with regular tax codes, ensuring the correct amount of tax is deducted in real time
An HMRC spokesman told This is Money in January: ‘Those who, for the first time, start to receive ongoing pension payments will benefit from this change.
‘We’re considering options for people taking ad-hoc lump sums and will consult with the industry before taking our next steps.’
Webb said: ‘How longer will all of this go on? Ten years on from the introduction of Pension Freedoms, tens of thousands of people each year are still having to fill in forms to claim back overpaid tax on their pensions from HMRC.
‘This is a system designed for the convenience of the tax office, not the taxpayer.
‘Given that most people in retirement pay tax at the basic rate, it would not be difficult to have a system which got things right for most people most of the time, rather than making over-taxing people part of ‘business as usual’.
‘It is time to that the whole system was simplified and made more predictable for pension savers looking to draw on their pensions.’
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