HM Revenue & Customs has returned more than £56mn in overpaid tax to savers who accessed their pensions in the second quarter of 2023.
The tax authority said it had processed 15,839 pension flexibility claims forms from April 2023 to June 2023 and repaid £56.2mn to people who had been charged emergency tax when they withdrew money from their pension pot.
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.
Where the provider does not have the correct tax code - which is in the majority of cases - withdrawals are taxed using a higher rate emergency tax code.
This 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.
Those hoping to use their funds are faced with a system that causes prolonged waiting periods before they can receive the full amount.Jon Greer, QuilterJon Greer, head of retirement policy at Quilter, said the £56mn figure was up nearly £8mn on the first quarter of 2023 and nearly double the £33.7mn collected in the same period last year.
“There has been a significant increase in the number of claim forms processed, illustrating just how many people are turning to their pension pots to help them get by as the cost-of-living crisis intensifies,” he said.
“However, despite it being a time when people need swift access to their money more than ever, those hoping to use their funds are faced with a system that causes prolonged waiting periods before they can receive the full amount.”
Greer added that an overhaul of the system is needed as the current process is leaving an increasing number of people facing emergency tax at a time they need their money most.
He added: “The cost-of-living crisis is putting real pressure on everyday finances and people may be considering accessing their pension flexibly as a result. For those in this position, it could be worth speaking to a professional financial planner who can help reduce the risk of paying excessive upfront taxes, such as by making multiple smaller pension withdrawals as opposed to taking a single lump sum.
“This can ensure that most of the withdrawal utilises an updated tax code, preventing emergency taxation on the full amount.”
An HMRC spokesperson said: “Nobody overpays tax as a result of taking advantage of pension flexibility.
“We will automatically repay anyone who pays too much because they’re on an emergency tax code. Individuals can claim back any overpayment earlier if they wish.”
amy.austin@ft.com
