You risk being charged emergency tax if HMRC treats your first pension withdrawal as if it will continue to be paid each month
Thousands of pension savers have claimed back more than £10,000 in emergency tax on their retirement savings in the last tax year – with some people getting back more than £100,000.
You risk being charged emergency tax if HMRC treats your first pension withdrawal as if it will continue to be paid each month – even if you don’t make any further withdrawals that tax year.
You can normally withdraw up to 25% of your pension tax-free from the age of 55, and then you’re charged your normal income tax rate on the remaining 75%.
Royal London obtained information from HMRC revealing the numbers following a Freedom of Information (FOI) request. According to the data, 11,700 pension savers claimed back £5,000 or more in emergency tax in the 2023/24 tax year.
This is up by 2,000 (21%) people compared to the previous year. Of those, 2,400 claimed sums in excess of £10,000, a year-on-year increase of 100 (4%).
The average refund per saver was £3,342, up £280 (9%) on the previous year, with many pension savers often having to wait to get the money back. The top 25 refunds averaged an eye-watering £106,897.
In total, around 60,000 investors claimed refunds in 2023/24 compared with approximately 50,000 the year previous, an increase of 20%.
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.
“Suddenly, that large chunk of money which had been earmarked for something special, like a new kitchen or the holiday of a lifetime, has shrunk considerably, and in some cases these plans may have to be postponed or abandoned altogether.
“If these withdrawals are being made to help children or grandchildren get a foot on the housing ladder, then the effect can be to derail a home purchase at the last minute when it’s discovered that the money required to complete the purchase has suddenly been eroded.
Can I claim overpaid pensions tax back?
You can claim back the difference between how much you paid in emergency tax, and how much you should have paid with your normal tax rate, by filling out a form online. Alternatively, you can wait for HMRC to repay you at the end of the tax year.
You’ll need to fill out one of the following three forms, depending on how you have accessed your retirement pot.
- If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z
- If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z
- If you’ve only flexibly accessed part of your pension pot then use form P55