Pension freedoms tax trap catches out up to 150,000 each quarter
Official figures suggest a higher proportion of people have been overtaxed from their pension tax claims.
9th May 2019 11:06
by Faith Glasgow from interactive investor
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Official figures suggest a higher proportion of people have been overtaxed from their pension tax claims. Here's what to do if you think you've been overtaxed on a pension withdrawal.
Latest figures from HMRC show that £433 million has been reclaimed in total since pension freedoms were introduced in April 2015.
The changes have enabled people to withdraw as much of their pension pot as they want, but if they withdraw a large lump sum, or even the whole pension, on their first withdrawal they are in danger of being hit by a punitive 'emergency tax', which they then have to reclaim from HMRC.
A total of £31 million was reclaimed by around 12,600 individuals in the first quarter of 2019 – but statistics from the Financial Conduct Authority indicate that around 150,000 pensions are accessed for the first time each quarter. Many of them may also have been overtaxed.
After four years of pension freedoms, HMRC is still applying its 'Month 1' approach to the taxation of withdrawn pension funds. Under this system, the initial withdrawal will be treated by the pension provider as the first of 12 monthly withdrawals, so the usual tax allowances are divided by 12 and applied.
Despite coming under pressure from the pension industry in 2018 to change the way it taxes pension withdrawals, HMRC has so far refused to rethink its position.
If you believe you have been overtaxed on a pension withdrawal, you can reclaim using the online service through Government Gateway.
Alternatively, you can download the necessary form from gov.uk. But make sure you use the right form for your circumstances.
P50Z – if you have emptied your pension and have no other income in that tax year.
P53Z – if you have emptied your pension but have other taxable income.
P55 – if you haven't emptied your pension pot and you won't be taking regular payments.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.