HMRC over taxes pension savers by £1 billion

The amount repaid by HMRC in Q1 2023 is more than double the £22 million repaid in Q1 last year.

Related topics:  Later Life,  Pension
Rozi Jones | Editor, Barcadia Media Limited
26th April 2023
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"Eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around flexible pension withdrawals"

Figures published today by HMRC take the total amount of income tax overcharged by the Government on people withdrawing money from their pensions past the £1 billion mark since the introduction of pension freedoms in 2015.

Under current rules, when an individual first takes money out of their Defined Contribution pension they are often charged at an ‘emergency’ tax rate, with the duty then being on the saver to claim back overpaid tax by filling in one of three forms.

In the latest 'Pension Schemes Newsletter', HMRC say that the latest three months a further 15,856 people successfully claimed back a total of £48.5 million. But adding up all the quarterly figures since 2015 gives a total amount paid back to £1.018 billion.

In addition to money repaid by HMRC to those who fill in a claim form, there will be some savers who didn’t fill in a form and eventually get a tax refund when they fill in their tax return. HMRC does not publish figures for the numbers in this group but this means that the total amount of over taxation is likely to be significantly above the reported figure of £1 billion.

Steve Webb, former pensions minister and partner at LCP, 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 £1 billion 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.”

Andrew Tully, technical director at Canada Life, commented: “The latest HMRC numbers just show how complex the tax position around pension withdrawals is. Eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around flexible pension withdrawals which would mean HMRC is not processing refunds to the tune of £1bn.

“A good tip for those customers making a pension withdrawal for the first time, is to initiate a small withdrawal of say £100. That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals. That will result in the tax being taken at source being far more accurate in many more cases, not only reducing the burden of paperwork but equally importantly the customer receiving a more accurate withdrawal in the first place.”

Jon Greer, head of retirement policy at Quilter, added: "Fresh data from HMRC shows that pension tax overpayment refunds continue to be sky high as we move through the first quarter of 2023 reaching £48,550,827.

"This is more than double the £22 million repaid in Q1 last year. This huge increase in the number of claim forms processed demonstrates the continued necessity for people to access their pension funds amidst the intensifying cost-of-living crisis impacting day-to-day financial situations. Unfortunately, this system leads to prolonged waiting periods for people to receive their full expected amount at a time when they need it more than ever.

"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. It’s also worth bearing in mind that these stats don’t show the number of people who don’t make an in year reclaim; thus waiting for an automatic repayment after the end of the tax year in question. The issue is therefore much bigger than reported in these statistics.

"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. 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.

"This system clearly needs a rethink as these ever increasing figures do not point to a process that is working well."

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