Pensioners may be able to claw back cash after HMRC hit savers with up to £55,000 ‘emergency’ tax
Pensioners may be owed money from HMRC after making their first pension withdrawal
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Thousands of pensioners have claimed back more than £10,000 from the taxman after they were emergency taxed on retirement income, new HMRC data shows.
In the 2022/23 tax year, there were 2,300 incidents of pensioners being charged an extra £10,000 or more, with some forced to reclaim more than £50,000 in overpaid tax.
A further 7,400 people were charged more than £5,000 in emergency tax, a Freedom of Information (FOI) request obtained by Royal London found.
The average tax refund per saver was £3,062, however, the top 100 of those affected claimed back sums averaging £54,185.
People have been able to withdraw some or all of their defined contribution pension savings as lump sums from the age of 55 since a change to pension rules in 2015.
Taxation of pension withdrawals is similar to taxation on other income, with an “emergency” rate applied where there isn’t a tax code.
It means HMRC taxes the amount withdrawn as if it would be the pension saver’s monthly income every month for the rest of the tax year.
For a first withdrawal, someone removing £30,000 would usually get £7,500 as tax-free cash (25 per cent) and the remaining amount would be taxed as if their monthly income is £22,500 – even if they don’t intend to take any further pension income that year.
It means they would pay £8,503 in emergency tax, but if the basic rate tax had been applied it would be £1, 984. The additional £6,519 which makes up the difference would therefore need to be claimed back.
Clare Moffat, pension expert at Royal London, commented: “Naturally, this could come as a huge shock to some people, especially if they had earmarked the money for something specific like a holiday or home improvements.
“Suddenly, a big chunk of the money they thought they had coming to them has in fact gone to pay emergency taxes, which they probably hadn’t anticipated.”
Ms Moffat pointed out pension savers being charged more than £50,000 in emergency tax are “extreme cases”, as to trigger a tax bill of this size, they would be withdrawn a lump sum of more than £200,000.
She added: “There aren’t too many scenarios in which someone will need this amount, except maybe to help their children or grandchildren get a foot on the housing ladder.”
A growing number of savers are falling foul of the rules each year as cost of living pressures force more people to dip into their pensions, Royal London warned.
To get a refund, the saver must complete one of three forms and then wait for a refund, which should be paid within 30 days of receiving the claim.
If they fail to complete the paperwork, the person must wait for HMRC to review the payments later.
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A growing number of savers are falling foul of the rules each year as cost of living pressures force more people to dip into their pensions, according to Royal London
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The pension expert explained one way for people to avoid this emergency tax when withdrawing their pension is to make a small initial withdrawal, which would trigger a less punitive tax code on future withdrawals. However, this might not be a practical solution for those needing the money quickly.
Ms Moffat said: “These are not small sums and illustrate how the current system is springing an unwelcome surprise on many at a time of their lives when they can least afford it.
“People are handing more money to HMRC than they should, but there are ways to avoid this. While there may be a desire or an urgent need to make your first pension withdrawal a large one, you should be mindful that you may find yourself charged excessive tax.
“A far better approach is to make your initial withdrawal a modest one and this will govern how much tax you pay on future withdrawals. If you do need to make a large withdrawal, remember that you will pay more tax, especially if you have a large purchase in mind or something you need the money for.”
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.”