HMRC makes pension savers pay tax they do not owe

Britons have overpaid over tax on pension withdrawals to the tune of £1billion, according to new data. Figures published today by HMRC have shown the total amount of income tax overcharged by the Government on those withdrawing money from their pension has soared.

The sum repaid by HMRC has passed the £1billion mark for the first time since the introduction of pension freedoms in 2015.

Under present rules, if a person takes money for the first time out of their Defined Contribution pension, they are often charged at an “emergency” tax rate.

While HMRC is willing to pay back the overcharged money, the duty falls on the saver to claim back their overpaid tax.

Britons are required to fill in one of three forms to get their money back, and HMRC reports the number of people who have had to claim in this way.

In their latest update, the Revenue states in the last three months a further 15,856 people successfully claimed back a total of £48.5million.

Adding up all of the quarterly figures dating back to 2015 gives a total repaid amount of £1.018billion according to consultancy LCP.

In addition to this, some savers will have not filled in a form, and will eventually get a tax refund through their tax return.

With these numbers not published, LCP estimates the total amount of overtaxation is likely significantly above the £1billion reported.

Don’t miss…
Pensioners could get up to £3,500 plus valuable £301 payment[LATEST]
Cost of living payment worth £301 to be issued from today[INSIGHT]
‘I followed rules but I’ve got a tax headache after pension changes'[EXCLUSIVE]

Sir Steve Webb, former pensions minister and partner at LCP, expressed his distaste for the current system.

He said: “This is an absolute disgrace. A system based on systematic over-taxing of pension savers cannot be right.

“There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place.

“And we are not talking about small sums, with over £1billion being paid back by HMRC so far.

“Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury.”

Jon Greer, head of retirement policy at Quilter, also weighed in, adding: “The ongoing cost-of-living crisis is exerting significant pressure on personal finances, and it is likely that more people will need to access their pension savings in the coming months to make ends meet.

“For Q1, the average tax refund per saver was £3,062. This problem stems from a peculiarity in the PAYE system when individuals begin withdrawing money from their pension as they are not taxed using the correct tax code.

“For anyone looking to access their pension flexibly, it may be worth consulting a professional financial adviser who can help reduce the risk of paying excessive upfront taxes.

What is happening where you live? Find out by adding your postcode or visit InYourArea

“For instance, by making multiple smaller pension withdrawals rather than a single lump sum. This can ensure that most of the withdrawal utilises an updated tax code, preventing emergency taxation on the full amount.”

A Government spokesperson told “Nobody overpays tax as a result of taking advantage of pension flexibility.

“We will automatically repay anyone who pays too much because they’re on an emergency tax code.

“Individuals can claim back any overpayment earlier if they wish.”

Source: Read Full Article