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HMRC refunds £49 million in overtaxed pensions
HMRC refunds overcharged pensioners £3,800 on average after first-time pension withdrawal overtaxation
Pensioners have been given back nearly £49 million in pension taxes through HMRC refunds that were overpaid between April and June this year.
On average, pensioners received £3,800 back from over-taxation with around 13,000 refund forms filled out.
The pension over-taxation issue has been unresolved for a long time and comes down to technical ways in which HMRC calculates taxes owed on first-time pension withdrawals.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown comments: “The overpaid pension tax saga continues to drag on.
“In just three months, HMRC has repaid a whopping £48.7m to people who paid too much tax for simply accessing their pension. With an average refund of around £3,800, these refunds amount to a significant chunk of change.”
Why do pensions get taxed too much?
The issue stems from the first time that someone withdraws a lump sum from a pension. HMRC sees this withdrawal and classes it as monthly income, regardless of the real intention. The pension holder is then taxed on this basis.
Pension expert Morrissey explains: “The problem hits people who are taking a lump sum from their pension for the first time. They get taxed on what is known as a “month 1” 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.”
However, this is all an administrative issue and the over-taxed money can be claimed back. You can also effectively trick the system into charging you a normal amount according to Morrissey, by making your first withdrawal a small nominal size.
“The money can be reclaimed,” she says. “HMRC processed close to 13,000 forms between the beginning of April and end of June, but it’s an admin headache that people can well do without. Ten years on from the advent of Freedom and Choice it’s a process that should have been consigned to history.
“There are things you can do to mitigate it. 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 or home renovations, for instance, you will need to plan ahead to make sure the money you take isn’t whittled away by tax which could delay your plans.
“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 tax year.”
