Tax  

HMRC pays back £31m overpaid pension tax

HMRC pays back £31m overpaid pension tax

HM Revenue & Customs has repaid £31.1m during the first quarter of 2019 to more than 12,500 people, according to figures released yesterday (April 30).

This represents an increase of the overpayments when compared to the last quarter of 2018 when the taxman repaid £30.2m to almost 14,000 people.

Overall, HMRC has given back more than £433m to taxpayers since the introduction of the pension freedoms.

With the pension rules, which came into force in 2015, savers have been able to take income from defined contribution plans in any way they like.

But any withdrawals above the 25 per cent tax free amount are taxable at an individual's marginal rate of income tax.

In some cases, the pension provider will already have a proper tax code for the beneficiary, if the saver has previously withdrawn money from their pension during the tax year.

However, where the provider does not have the correct tax code for the individual – which is in the majority of cases -  withdrawals are taxed using a higher rate emergency tax code, which routinely results in an excessive tax deduction that has to be reclaimed later.

Tom Selby, senior analyst at AJ Bell, noted that four years have passed since the introduction of pension freedoms, but HMRC’s "highly dubious tactic of hitting savers with an emergency tax charge on their first withdrawal" still hasn’t been formally consulted on or reviewed.

He said: "Regardless of whether you think this is the right approach or not, this failure to properly consider a policy which impacts hundreds of thousands of savers is nothing short of a disgrace."

Mr Selby noted that the people most likely to be negatively impacted were the less wealthy, who aren’t familiar with tax forms and can’t afford to pay for financial advice.

He added: "While Brexit is understandably dominating political discourse at the moment, government still has a duty to make well-evidenced policy and enact changes where citizens are penalised unfairly.

"Given the ever-growing number of people affected by HMRC’s approach it is now imperative a thorough review – including input from those on the frontline – is initiated to find a better way forward."

HMRC stated in a  newsletter published last June it had been reviewing the process for flexible pension drawdown payments, but it had concluded "that any changes at the current time would not significantly improve the tax position for the majority of recipients of a flexible drawdown payment, when compared to the process currently in place".

It had been urged to look at ways to fix the problem by the Office for Tax Simplification.

According to Tom Barton, pensions partner at law firm Pinsent Masons, when simplification was introduced in 2006 it was supposed to end the "many horrors of pensions taxation".

However, the promise of simplification never quite came true in practice even before pensions freedoms came along, he noted.