Tax is not taxing

Samantha Downes

Samantha Downes

The news that thousands of people who have been taxed too much on their pension withdrawals are failing to claim that tax back, appears to have struck a chord with many of you.

It was one of the most read stories on our sister website FTAdviser and was also one of the most commented on.

Just to refresh your memory, pensions expert AJ Bell explained how many pension schemes do not have tax codes for their members. This then means HM Revenue & Customs requires the pension provider to apply tax on a "month one" basis. So under these guidelines the scheme must assume that the sum withdrawn in the first month will be repeated every month.

In the case of a £10,000 withdrawal, the member would pay £3,099.46 in tax.

The tax levied assumes this would happen every month. But if the member made no further withdrawals that year, that £10,000 should be tax free.

On the flip side someone making a one-off withdrawal of £40,000, meanwhile, would pay £16,428.56 in tax rather than the correct amount of £5,798.

Of course the amount of tax paid in both cases is too much. But - while in the past this column is normally on the side of the taxpayer  - with this one it is not too hard to be on the side of HMRC. Taxing the payments at source means that the investor doesn’t have a tax liability.

But it is up to them to claim the overpayment back. Many of you who commented pointed out that far from an onerous experience HMRC had been on the whole quite efficient at making sure the overpayment is refunded. It’s up to us to make sure we know our tax code and are paying the right amount of tax, we can’t leave everything to HMRC. One articulate reader summed it up quite nicely  "Thousands taxed correctly on pension freedoms but lack of advice or knowledge means they don't claim the correct relief".