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HMRC overtaxed pension withdrawals by staggering £55m

Record levels of taxation spark calls for government to review its approach

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Overpaid income tax reclaimed by pension savers reached fresh heights in the quarter ending 30 September 2019.

HM Revenue and Customs (HMRC) had to hand back over £54.9m ($70m, €63m) in tax on pension withdrawals, the highest quarterly figure since pension freedoms were introduced in 2015.

The average reclaim breached £3,000 for the first time in the latest quarter.

Since pension freedoms, the total amount of “emergency tax” on withdrawals (which was subsequently repaid) now stands at £535m.

Matter of urgency

Steve Webb, director of policy at Royal London, said: “Even by their own low standards, HMRC have outdone themselves in the last three months, taking more than £54m of savers’ money in income tax to which they were not entitled.

“It cannot be right that tens of thousands of people each year have too much tax taken out of their pension and then have the hassle of filling in a form to get back money that is rightfully theirs.

“Whoever ends up running the country after the general election needs to tell HMRC to stop this practice as a matter of urgency.”

Claiming

Under current rules, when an individual withdraws money from their pension, HMRC makes assumptions about how many more times they will make withdrawals over the rest of the financial year.

By guessing that the individual will make lots of withdrawals, HMRC assumes that people will often go into the 40% tax band and therefore takes a large chunk of tax from the withdrawal.

This is often a false assumption, but individuals then have to fill in one of three different forms to get their money back or wait until the year-end tax return process.

The government’s Office for Tax Simplification has called on HMRC to review this process of applying such “emergency” tax codes to pension withdrawals, but the UK tax collector has not acted yet.

Tip of iceberg

Tom Selby, senior analyst at AJ Bell, said: “Given most people don’t fill out these forms, this is almost certainly the tip of a sizeable iceberg.

“It is time for the government to accept that, while the retirement flexibilities introduced in April 2015 have been well received by savers, the tax system that sits alongside them is simply not fit for purpose.

“People risk being left short of money as a result of HMRC’s approach and forced to either take out more cash from their pension, potentially paying extra tax in the process, or seeking the funds from elsewhere.

“At the absolute bare minimum, the government needs to urgently review its approach to the taxation of pension freedoms withdrawals, which has never been consulted on formally.

“Its failure to do this so far represents a serious failure of policymaking which will inevitably have caused people distress and potentially significant financial hardship.”

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