HMRC figures, obtained by Royal London through a freedom of information request, show that the number of refunds claimed has increased in 2023/24.
Thousands of pensioners could be owed £10,000 or more in tax refunds(Image: Catherine Falls Commercial via Getty Images)
Thousands of pensioners have reclaimed over £10,000 – and in some instances more than £100,000 – after being excessively taxed on their pension withdrawals, according to recent analysis.
Data from HMRC, procured by Royal London through a freedom of information (FOI) request, indicates an uptick in the number of refunds claimed in the 2023-24 tax year.
This follows the introduction of pension freedoms in 2015, which provided those aged over 55 with a variety of options on 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, while the remaining 75% is taxed as income.
However, an “emergency” rate is applied to pension withdrawals, with HMRC presuming it will be the pensioner’s monthly income for the remainder of the tax year – implying that people could be overcharged if they make one-off withdrawals, reports the Manchester Evening News.
Approximately 60,000 pension savers claimed refunds in the 2023-24 tax year, a 20% increase from the roughly 50,000 the previous year, as per Royal London’s data. Around 11,700 pensioners reclaimed £5,000 or more, including 2,400 who received refunds exceeding £10,000.
The average refund was valued at £3,342, which was £280, or 9%, higher than in 2022-23. The top 25 refunds averaged at £106,900, according to the data.
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.”
Since April, HMRC has altered its procedures to ensure tax codes are automatically revised for those beginning to receive a private pension for the first time.
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Ms Moffat explained that the Government’s ruling that unused pension funds will become liable for 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 exempt from inheritance tax, making them an attractive tax-efficient method of transferring wealth.
“A rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals,” she said. “So, the problem of emergency taxes isn’t going away, and there’s a chance it could get worse.”
The figures showed that approximately £1.4 billion has been refunded since 2015. A representative for HMRC stated: “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.”
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