To get the overpaid tax back, people either have to make a claim themselves or wait for HMRC to review the self-assessment payments and then issue a refund
HMRC has refunded more than £44million to pensioner who overpaid tax on their pensions this year. According to official figures, 15,000 reclaim forms were processed in the first three months of this year.
According to the data, the average reclaim sat at £2,881. This is the lowest average claim for six years, according to analysis from AJ Bell. Since reforms were introduced in 2015, retirement savers who make an initial withdrawal from a “defined contribution” pension pot are taxed by HMRC. However, instead of the normal income tax rate, HMRC issues an emergency tax rate as if this person will pull out this amount from their pot every month.
This means they pay thousands of pounds more in tax than they actually owe, which they then need to claim back. For example, if someone withdraws £10,000 from their pension pot one month, HMRC taxes them as if they will be withdrawing £120,000 that year.
Since 2015, over £1.4billion has been repaid to people who were overtaxed on their first pension withdrawal. To get the overpaid tax back, people either have to make a claim themselves or wait for HMRC to review the self-assessment payments and then issue a refund.
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The exact amount you can get back if you overpay obviously depends on how much money you took from your pension, what other income you have, and your tax rate. Although people are not permanently out of pocket, it can often be several months before the emergency tax is corrected.
Experts have called for reform for years, and after the latest release, many have reiterated the call again, describing the current method as “outdated”.
Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket.
“The average reclaim has fallen slightly this quarter to £2,881, its lowest level in almost six years. Despite this, these figures show too many people are still being overtaxed because of the Revenue’s outdated approach.
“These figures are likely to be only the tip of the iceberg, however, as they only capture those who fill in the relevant HMRC reclaim form. In reality many more people will not go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order at the end of the tax year.”
From April 2025, the Government is improving its tax code process so those taking regular drawdown income will be moved from an emergency code to paying the right amount of tax more quickly, but Selby says this won’t help those taking a one-off withdrawal3.
Tom added: “We have only just blown out the candles on the cake celebrating 10 years of pensions freedoms. It is simply unacceptable that after all this time the Government has still not managed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.
Jamie Clark, retirement specialist at Quilter, noted that the latest pension flexibility statistics “reveal HMRC’s plans to streamline tax coding from the current tax year couldn’t come soon enough”.
He said: “HMRC’s new tax coding process should not only reduce the administrative burden on savers, but hope it will also minimise the number of overpayments being made in the first place. Nonetheless, pension withdrawals will remain a challenge. Many people are still reliant on their pension savings to manage financial pressures, and any hasty decision to access these funds could not only result in unintended, and often unexpected, tax consequences, but they could also hamper longer-term financial plans.”
He added: “With hope, we will see the number of repayment claim forms being processed fall from here on out thanks to HMRC’s efforts to improve the system, but there is still a long way to go to ensure it works seamlessly. In the meantime, it is likely that some retirees will still face significant overpayments and subsequently the often arduous task of reclaiming their money.”
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