It has been revealed that HM Revenue & Customs (HMRC) has refunded more than half a billion pounds in overpaid tax since the pension freedom rules were introduced in 2015.
Designed to give people more control over their finances, the rules allow over-55s to withdraw money from their defined contribution pension pots as and when they want.
But according to new data, the taxman has overcharged pensioners by £600.4 million on these withdrawals. Thankfully, HMRC has been refunding this money to those who made claims.
In the first three months of 2020, almost £33m was paid back to pension savers. During the same period, more than 10,000 people made an application to claim back cash from HMRC. The average sum repaid was £3,141.23.
The total number of overcharged savers is still unknown, as these figures only represent those who have actually made claims themselves. Therefore, if you have made a withdrawal from your pension pot over the past five years, you could be owed a tax refund.
Reasons why pension savers are being overtaxed
Under the pension freedom rules, people aged 55 and over are able to withdraw the first 25 per cent of their pension tax-free. After this, income tax is applied to the remaining 75 per cent of their pot.
Unfortunately, it’s possible to overpay tax the first time you withdraw from a pension, as your provider might not know your tax code or details of other income you have.
As Kim Kaveh of Which.co.uk explains: “If your provider doesn’t have this information, withdrawals are taxed using a higher-rate emergency tax code, calculated on what is known as a ‘Month 1’ basis. This means you’ll be taxed as though the lump sum you’re withdrawing will be repeated every month.
“For instance, a £10,000 withdrawal could see you being taxed as though your annual income is £120,000.”
How to claim back an overtaxed pension
If you have taken money out of your pension, make sure you haven’t paid more than you should have in tax. The process of reclaiming your money is relatively straightforward and can be done online via the government’s tax refund website.
You will need to fill out one of the following forms:
- P55 – A P55 form should be used if you haven’t withdrawn your entire pension pot and are not taking regular payments either. HMRC received 6,286 of these claims from savers in the first quarter of 2020.
- P53Z – A P53Z form should be completed if you have withdrawn all of your pension and also receive other taxable income. A total of 2,973 claims were made in the first three months of this year.
- P50Z – A P50Z form should be completed if you’ve withdrawn all of your pension, but have no other taxable income. Only 1,138 of these were made during the first quarter of 2020.
If you don’t want to use the government’s online service you can also fill out a form and post it to HMRC. You should receive a refund of your overpaid tax within 30 days.