Pension Freedom  

Taxpayers clawback half a billion pounds from HMRC

Taxpayers clawback half a billion pounds from HMRC

Taxpayers have been forced to claim back £493m from HM Revenue & Customs (HMRC) since April 2015 after being overtaxed - with pensioners among the hardest hit.

According to analysis from Royal London, there are currently two areas of the tax system where HMRC is now systematically collecting tax which it then has to hand back to taxpayers.

One is income tax on pension withdrawals, where savers accessing their pension pots through pension freedoms are taxed on an ‘emergency tax’ basis, and then have to fill in one of three different forms to claim the money back.

With the introduction of pension freedoms in 2015, savers have been able to take advantage of the high transfer values of defined benefit schemes and to move their nest eggs into defined contribution plans.

Since the system started in April 2015, the total amount refunded to these pensioner taxpayers has been £262m.

The second area is extra stamp duty on second homes, which turn out not to be second homes, Royal London said.

When someone completes the purchase of a house before they have sold their existing house, they have to pay an extra 3 per cent stamp duty on the transaction.

As long as these individuals eventually sell the first house, they then claim a refund on a tax really designed to hit buy-to-let landlords, not people moving house, the provider said.

Figures published today (31 January) show that the total amount which HMRC has had to refund to this group since April 2015 is £231m.

According to Sir Steve Webb, director of policy at Royal London, and former pensions minister, “HMRC is clearly out of control”.

He said: “It operates a system of ‘tax first, ask questions later’, presumably so that the government can enjoy some extra interest until the money is claimed back.

“It is time to speak up for ordinary citizens who are forced to pay excessive amounts of tax and then go through the hassle of claiming it back. This is a system built around the needs of the Treasury and the bureaucracy, not one which puts people first.”

Royal London is recommending that the current tax system should be reformed.

The provider is proposing that one-off pension withdrawals are simply taxed at the standard rate of income tax, with any outstanding balance collected by end year adjustments.

It also wants second home stamp duty not to be collected for routine house sale and purchases, except in cases where there is no linked sale and the intention is clearly to become a second home owner.

Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions, argued that the figures “are quite significant,” since pensions freedom was only introduced in April 2015.

He said: “What it shows is that our tax system is clearly inefficient and it’s certainly a case of ‘tax first, questions later’.

“For the vast majority of people, they’ve never had to complete a tax return in their lives. And at the point of retiring, they then find themselves needing to complete a tax return for the first time in order to claim back their overtaxed money.”