HMRC hands back £32m emergency pension tax

HMRC hands back £32m emergency pension tax

HM Revenue & Customs (HMRC) has paid back more than £32m in overpaid tax to individuals who have withdrawn money from their pensions during the last quarter of 2019.

The tax authority published the data yesterday (January 28) alongside details on the number of tax repayment claims forms it processed from October 1 to December 31, 2019.

More than 10,000 pension flexibility claims forms were processed by HMRC in the final quarter of 2019 and a total of £32.2m was repaid to those who had been charged emergency tax when they withdrew money from their pension.

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some cases, the pension provider will already have a proper tax code for the beneficiary, if the saver has previously withdrawn money from their pension during the tax year.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

Jon Greer, head of retirement policy at Quilter said the figures showed pension savers have been forced to claim back an average of more than £3,000 per person.

Mr Greer said: “The problem has nothing to do with anything pensioners have done wrong and lies solely with the PAYE system. 

“HMRC’s PAYE system is not built for one-off withdrawals from a pension and so does not fit with the new world of pension freedoms.

“People who make such withdrawals from their pensions, as is their right, may overpay tax and then wait 12 months or more to get the money back when HMRC automatically reviews tax liability.”

Those that have been overtaxed can fill in one of three different forms - the P55, P53Z and P50Z - which allow people to claim back money from HMRC mid-way through the tax-year.

Mr Greer added: “The onus is very much on the government to ensure it is doing all it can to give pensioners their hard earned money back. An over £3,000 hit on your pension can be substantially detrimental to your lifestyle in retirement.”

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