HMRC dismisses concerns about tax overpayment

HMRC dismisses concerns about tax overpayment

HM Revenue & Customs has dismissed concerns about its pension tax policy which sees individuals having to recoup any overpaid tax when they take income from their defined contribution pot.

FTAdviser reported this week that the taxman repaid £31.1m during the first quarter of 2019 to more than 12,500 people affected by this issue.

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

Nevertheless, the taxman denies that people are paying more tax than they should.

With pension freedoms, which came into force in 2015, savers have been able to take income from DC 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some cases, the pension provider will already have a proper tax code for the beneficiary, if the saver has previously withdrawn money from their pension during the tax year.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 them – 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.

Providers have called for a change to this policy to avoid people overpaying.

But an HMRC spokesperson said: "Nobody will overpay tax as a result of taking advantage of pension flexibility.

"Individuals can claim back any overpayment due to an emergency tax code being applied immediately and we will repay this in 30 days.

"Anyone who does not claim will be automatically repaid at the end of the year."

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".

Nathan Long, senior analyst at Hargreaves Lansdown, argued that HMRC’s systems should ensure people don’t overpay tax, saying the problem for individuals is the timing of their personal tax hit.

He said: "People who need a one-off lump sum need to be careful. If they’re organised, putting in a reclaim immediately after the event can allow a timely tax reclaim, if not they’ll be waiting for the rest of the year before the tax settles out.

"The danger is people end up nibbling more heavily into their pension to ensure the lump sum they get after the initial tax is sufficient. It’s a further reminder of quite how important it is to plan pension withdrawals carefully."

Paul Gibson, managing director at Granite Financial Planning, noted that the "current system is flawed and clients find the whole process baffling and unfair".

He said: "A fairer way would be to deduct 20 per cent with any excess payable via self-assessment."