HM Revenue & Customs has returned more than £45mn in overpaid tax to savers who accessed their pensions during the last quarter of 2022.
The tax authority said that between October and December, it had processed 14,335 pension flexibility claims forms and repaid £45.03m to people who had been charged emergency tax when they withdrew money from their pension pot.
According to Canada Life, since pension freedoms were introduced in April 2015, £970mn has now been re-paid to customers by HMRC.
Andrew Tully, technical director at Canada Life, said: "Almost eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around pension withdrawals which would mean HMRC is not processing refunds of over £40mn in just a three month period, and close to £1bn since 2015."
Under the pension freedom rules people aged 55 plus can freely access their cash. But any withdrawals above the 25 per cent tax free amount are taxable at an individual's marginal rate of income tax.
Particularly in a time of cost-of-living pressures, a solution to this clunky quirk needs to be foundJon Greer, QuilterWhere 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.
But Tully said there could be a workaround for some savers.
He explained: "For customers making a pension withdrawal for the first time, a workaround is to initiate a small withdrawal of say £100. That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals.
"That will result in the tax being taken at source being far more accurate in many more cases, reducing the paperwork but equally importantly the customer receiving a more accurate withdrawal."
Jon Greer, head of retirement policy at Quilter, said the most recent figures worked out at an average of £3,215 paid back by HMRC per claim made.
He said many people opt to take a lump sum because they may need the funds to cover a one-time expense or financial emergency.
“While someone will eventually get the money back, it would seem unduly bureaucratic to expediate that process by having to make a claim themselves to receive their tax refund promptly,” Greer said. “Many people will fail to make that reclaim, and could have to wait many months before the money is repaid.”
He added: “Particularly in a time of cost-of-living pressures, a solution to this clunky quirk needs to be found as right now the burden is being unduly placed on savers to not only recognise they are out of pocket, but then require them to fill out paperwork if they want their money back immediately.”
An HMRC spokesperson said: “Anyone who ends up paying more tax than they should due to an emergency tax code being applied will automatically be repaid at the end of the year. Individuals have the option of claiming back any overpayment earlier if they wish. Ultimately, nobody will overpay tax as a result of taking advantage of pension flexibility.”
amy.austin@ft.com
