HMRC refunded over £46m in overpaid pension tax between the 1 October and 31 December last year, according to data.
I wrote about the same issue several months ago – it’s a long running saga that has the potential to cause real upheaval and, if it catches you unaware, it could have a major impact on your plans.
The problem hits people who are taking a taxable lump sum from their pension for the first time. It means they can get taxed on what is known as a “month 1” basis.
HMRC refunded over £46m in overpaid pension tax between 1 October and 31 December last year.
(Kemal Yildirim via Getty Images)
This is where it’s treated as though the same amount will come out every month. It can result in a far bigger tax bill, which can come as an unpleasant surprise at best, or at worst, de-rail people’s retirement plans. The data shows that, during the three-month period, over 13,000 refund forms were processed.
The good news is that the money can be reclaimed but it’s still an admin headache and a high price to pay in terms of time, annoyance and paperwork for accessing your own money. It’s something that should have been consigned to history long ago.
How to claim a pension tax refund
So, what can you do if you get hit with a bill and need to claim a refund? 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 tax year.
The three forms can be found online at gov.uk and you need to fill in the one that best describes your situation.
A P55 should be used if you haven’t withdrawn your entire pension and are not taking regular payments.
A P53Z can be filled out of you have withdrawn all your pensions and also receive other taxable income.
A P50Z is for when you have withdrawn all your pension, but you have no other taxable income.
Read more: HMRC refunds £46m in overpaid pension tax in the fourth quarter
There are also things you can do to lessen the potential impact. For instance, you could make your first pension withdrawal a relatively small one. However, if you were looking to take a lump sum to fund travel plans for instance, you will need to plan ahead to make sure any tax bill doesn’t impact your plans.
This is an area that HMRC is looking into. It has said that it would look to identify people taking more regular income from their pensions and make sure their tax code is amended more quickly.
This will have an impact over time but it’s clear that, for now at least, it’s still a major issue that people will need to be aware of and prepare for as best they can.
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