HM Revenue and Customs had to repay £46,793,765 ($57,117,171, €51,650,958) in three months to retirees who paid too much tax on their pension savings, Hargreaves Lansdown has found.
The refunds happened between 1 April 2019 and 30 June 2019.
Around 17,239 people filed a tax reclaim on pensions withdrawals alone, with repayments averaging on £2,700 per individual.
“Getting hit with an unexpected tax bill is one of life’s nasty surprises. But what really adds insult to injury is paying more tax than you actually owe,” said Nathan Long, senior analyst at Hargreaves Lansdown.
Understanding tax
Long added that getting your head around how the tax system work can avoid people from getting overtaxed.
“Although tax might not be the first thing that springs to mind when you’re planning how to spend your retirement pot, understanding how it works before you take money from your pension could significantly reduce your tax bill.”
And that is especially true for people who go into drawdown through pension freedoms.
Tailored withdrawals
Long said: “After you take your tax-free cash (usually 25% of your pension), which is accessible from age 55 (57 from 2028), any withdrawals are treated as income and added to any other income you’ve received in the same tax year.
“Most people have a tax-free personal allowance of £12,500 for the current tax year (2019/20). Any amount above this will be taxed either at the basic, higher or additional rate.
“Getting to know the different tax bands, can help you manage your withdrawals.
“For instance, let’s say you were already receiving £10,000 income a year, and you wanted an additional one-off payment of £50,000. If you took this out in one tax year, you’d pay £11,500 in tax.
“But if you spread the £50,000 withdrawal across two years (£25,000 in each) you’d only end up paying £9,000 tax in total. That’s an extra £2,500 in your pocket instead of the taxman’s.”
People, however, need to be aware that tax rules and allowances change every year and that withdrawals should be tailored to individual circumstances.
Check your tax code
In order to pay unnecessary extra tax, Long said people should make sure their tax code is correct.
“If you’re planning to take a large payment, you might want to wait until your pension provider has your correct tax code. It could save you time, money, and the unwanted task of completing any tax reclaim paperwork.
“In fact, if you took out anything over £13,542 you’ll be taxed the equivalent of someone who normally earns £150,000 or more a year.
“Typically, HMRC should send your correct tax code after you’ve taken your first flexible pension payment so you may need to request a smaller payment first.”
