HM Revenue & Customs (HMRC) has returned more than £42m in overpaid tax to savers who accessed their pensions during the last quarter of 2021.
The tax authority said it had processed 13,579 pension flexibility claims forms and repaid £42.2m to people who had been charged emergency tax when they withdrew money from their pension pot.
According to calculations by LCP and AJ Bell, this takes the running total of tax repaid by HMRC since pension freedoms were introduced in April 2015 to about £835m.
Tom Selby, head of retirement policy at AJ Bell, said: “Savers continue to be hit in the pocket by HMRC simply for accessing their retirement pot.
“What’s more, the true figure is likely to be significantly higher as this only covers people who fill out one of three official reclaim forms. HMRC says those who don’t go through this process will be refunded at the end of the tax year.
“It is beyond belief as the 7th anniversary of the pension freedoms reforms approaches that the tax system continues to operate in this way. Having introduced flexibility over pension access from age 55, an upgrade of the tax system is now long overdue.”
Under the pension freedom rules people aged 55 plus can freely access their cash. However, any withdrawals above the 25 per cent tax free amount are taxable at an individual's marginal rate of income tax.
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.
There are three forms - P55, P53Z and P50Z - that allow people to claim back money mid-way through the tax-year.
Steve Webb, former pensions minister and partner at LCP, has called on HMRC to fix this issue.
Webb said: “HMRC’s approach is to tax first and ask questions later. This ‘money merry-go-round’ where people have large amounts of tax deducted and then have to claim back some of it has gone on long enough.
"The system is run purely for the administrative convenience of HMRC rather than the benefit of taxpayers. It would be much fairer simply to deduct basic rate tax from pension withdrawals and then adjust the amounts paid if this did not give the right answer, rather than overtaxing thousands of people every month."
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.”
amy.austin@ft.com
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