Just 12,600 pension tax claim forms were completed in the first three months of 2019, but official figures suggest the actual number of those that have been overtaxed is much higher.
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After four years of pension freedoms, HMRC is still applying its ‘Month 1’ approach to the taxation of withdrawn pension funds.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.
Tom Selby, senior analyst at AJ Bell, calculates that someone with no other taxable income who made a £10,000 withdrawal could be taxed by almost £3,000 under the system.
“It is now over four years since the pension freedoms were introduced and HMRC’s highly dubious tactic of hitting savers with an emergency tax charge on their first withdrawal still hasn’t been formally consulted on or reviewed,” he comments.
“Regardless of whether you think this is the right approach or not, this failure to properly consider a policy which impacts hundreds of thousands of savers is nothing short of a disgrace.”
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.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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