UK savers reclaimed £57m in overtaxation on pension withdrawals in April, May and June 2024, according to new HMRC figures in its Newsletter 161 (August 2024) .
Over 16,000 reclaim forms were processed during the quarter, with an average reclaim of £3,540 – the third highest figure on record, while almost £1.3bn has now been reclaimed by people overtaxed on pension withdrawals since 2015.
Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers, with the latest official figures revealing almost £1.3 billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back. Worryingly, the average reclaim per person spiked to £3,540 during the latest quarter, the third highest three-month figure on record.
“The true overtaxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment system might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.
“It is simply unacceptable that, almost a decade on from the introduction of the pension freedoms, the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.
He continued: “One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.
“Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days. If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.
This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, landing hard-working savers with shock tax bills often running into thousands of pounds.
While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket.
It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. If you don’t, you are left relying on the efficiency of HMRC to repay you at the end of the tax year.
