Posted on: 31st October 2019
HMRC has reported that it has repaid £54.9 million in tax between June and September 2019 to over 17,000 people. This is a 15 per cent increase on the previous three months where £46.8 million was repaid.
These refunds have totalled £536 million in the 4.5 years since Freedoms were introduced in April 2015.
Pension tax system: Fit for purpose?
The huge sum has raised questions as to whether the tax system is suitable for the pension freedom era, which allows pensioners to enter drawdown instead of having to buy an annuity, as withdrawals tend to be treated with an emergency tax code if the provider doesn’t have an accurate code for the client, instead of the client’s usual marginal rate.
Tom Selby, a senior analyst at AJ Bell, argues that the tax system for pension freedoms is ‘not fit for purpose’ as people risk being left short of money by the ‘pay now, reclaim later’ nature of the system or they are forced to take more money from their and potentially paying even more tax.
Mr Selby said “At the absolute bare minimum the government needs to urgently review its approach to the taxation of pension freedoms withdrawals, which has never been consulted on formally. Its failure to do this so far represents a serious failure of policymaking which will inevitably have caused people distress and potentially significant financial hardship.”
Ian Browne at Quilter and Sir Steve Webb at Royal London tend to agree that the system is not suitable and that HMRC has not adjusted to the new landscape well. Pensioners face a lengthy and laborious process to get their overpaid tax returned and the figures could be higher if everyone engaged in the process.
An HMRC spokesperson said: “Nobody will overpay tax as a result of taking advantage of pension flexibility. Individuals can claim back any overpayment due to an emergency tax code being applied immediately and we will repay this in 30 days.”
“Anyone who does not claim will be automatically repaid at the end of the year.”
How do I reclaim overpaid tax?
If you believe you have overpaid tax on a one-off lump sum, you can contact HMRC directly or complete form P55. HMRC will normally refund any overpaid tax within 30 days of receiving the claim. More information can be found here
If you think you have overpaid tax on regular pension payments, you may wish to contact your pension provider to check what tax code they hold for you. If this is incorrect, you can contact HMRC to adjust this tax code, any overpaid tax should be refunded via your next payment.
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