Pension tax refunds hit record £47m

Pension tax refunds hit record £47m

HM Revenue & Customs has repaid £46.8m in pension tax during the second quarter of 2019 to more than 17,000 people, a record since the introduction of the pension freedoms.

According to figures released today (July 31) this represents a 50 per cent increase on the overpayments found in the previous quarter, when the taxman repaid £31.1m to more than 12,500 people.

Overall, HMRC has given back some £480m to taxpayers since the introduction of the pension freedoms in April 2015.

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some cases, the pension provider will already have a proper tax code for the beneficiary, if the saver has previously withdrawn money from their pension during the tax year.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

FTAdviser reported today that 336,000 individuals made withdrawals from pensions, a record since the pension freedoms were introduced.

Sir Steve Webb, former pensions minister and director of policy at Royal London, has urged the government to reform the way pension withdrawals are taxed.

He said: “It remains a scandal that people who are legitimately accessing their own money, using freedoms given to them by the government, are routinely being over-taxed for the convenience of HMRC. 

“Thousands of people every month are having to fill in complex paperwork to recover tax they should never have had to pay.

“The latest figures show that this problem is now reaching epidemic proportions, with nearly half a billion pounds having to be prised out of HMRC’s hands and returned to its rightful owner. The new chancellor needs to address this issue as a matter of urgency.”

According to Tom Selby, senior analyst at AJ Bell, the near £500m reclaimed was "just a small part of the picture", with the "vast majority who don’t jump through these government-imposed hoops potentially having to wait until the end of the tax year to get their money back”.

He added: “It is incredible that more than four years on from the introduction of the pension freedoms we still have not had any public consultation on HMRC’s approach to taxing withdrawals.”

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.”

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