People tapping into their pension reclaim £33 million in overpaid tax: Are you affected?

People tapping into their pension reclaim £33 million in overpaid tax: Are you affected?

Between April and June 2022 just over 10,000 pension tax reclaim requests were processed by HM Revenue & Customs (HMRC).

The total value of tax payments repaid by people taking money from their pension pot stands at an estimated £33,689,819.

In light of this, people tapping into their pension savings pot are being urged to check to see if they have overpaid tax on their pension withdrawals.

Since 2015, £891 million has been repaid to savers being overcharged on tax.

However, this figure is misleading, as the HMRC’s statistics only capture the total repaid to people who have reclaimed tax payments.

This does not take into account those who have not reclaimed, which is likely to be far higher.  

Pension changes at a glance

Back in April 2015, anyone aged over 55 was given greater flexibility when accessing savings from their defined contributions pension scheme.

This flexibility allowed this group to have access to their pension pot, with the first 25 per cent being tax-free.

After seven years of people accessing their pension early, and with an eye-watering sum of money being paid out between April and June 2022 alone for overpaid tax charges, it begs the question of the ability of the tax system to accommodate those who make a withdrawal.

Why is this still happening to pension savers?

When making their first flexible withdrawal from their pension pot, providers apply tax to this withdrawal on a “month one” basis.

This means that the withdrawal becomes counted as if the same amount of money will be taken each month during that financial year, instead of being counted as a “one-off” withdrawal.

Subsequently, “emergency tax” is typically calculated on a higher annual withdrawal than the individual takes.

The emergency tax situation arises as a result of a peculiarity in the PAYE system when individuals start to withdraw money from their pensions.

How to avoid a large tax bill if you are withdrawing from your pension

There is a workaround for people looking to withdraw from their pensions and avoid a hefty tax bill.

If you are making a withdrawal for the first time, begin with a small sum, £100 for example.

A tax code will be generated from HMRC, which will be applied by the pension provider to subsequent withdrawals.

This will result in the tax being taken at the source accurately reflecting the withdrawal.

How do I reclaim my money?

If you believe you have been overcharged tax on your defined contribution pension, you will need to fill in one of the three claim forms available on the Government's Claim a tax refund webpage.

Need advice on your pension? Contact the team today.