People are being urged to check to see if they are owed money by the HMRC after millions of pounds was overpaid in tax. Those over the age of 55 have been able to withdraw funds from their pension pots since 2015.
However according to Which? many of those taking out money for the first time have been overcharged after being billed at an “emergency rate”. The consumer organisation said this had led to HMRC refunding nearly £49.5 million between the beginning of October and December 31 last year to pension savers.
Which? said the HMRC figures also showed more than 14,000 reclaim forms were processed during the quarter, with an average reclaim of £3,389. It added: “Almost £1.4 billion has now been reclaimed by people overtaxed on pension withdrawals since 2015.”
It explained people can access their pension pot in two ways. The first way is known as an uncrystallised fund pension lump sum (UFPLS) and allows you to take a 25% lump sum of your pension tax-free with the rest charged at your normal income tax rate.
The second is to take a lump sum from a pension drawdown plan. If you do this, 25% of your total pension savings is tax-free and any subsequent withdrawals are subject to income tax.
Which? explained: “Your pension company collects the tax on your behalf, so the lump sum you get is paid net of tax. However, many people overpay tax the first time they withdraw from their pension. This is because your provider may not know what your tax code is or details of other income, if you have any.
“If your provider doesn’t have this information, withdrawals are taxed using a higher-rate emergency tax code, calculated on what’s 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. If this goes unnoticed, it can make an unnecessary dent in your pension pot.”
HMRC is making changes to improve this from April. Which? said: “From April 2025, the government will improve its tax code process so these people will be moved from an emergency code to paying the right amount of tax more quickly. HMRC will adjust tax codes to ensure that over the course of the year you are taxed the correct amount.”
Those affected will then be notified by letter or digitally that their tax code has been changed. Steve Webb, former pensions minister and partner at LCP, added: “This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax.
“The tax system is complex enough as it is, and this change should hopefully reduce the complications which pension savers face when they try to access their hard-earned cash.”
Could you be owed a refund?
According to the consumer publication anyone taking a steady stream of income via drawdown, shouldn’t need to take any action as HMRC should adjust your tax code to ensure you pay the correct amount over the year. However, if you make a single withdrawal, it’s important to check you haven’t paid more than you should. You can do this online via the government’s tax refund website
If you have been overtaxed you can claim using one of three forms:
- P55 – a P55 form should be used if you haven’t withdrawn your entire pension pot and are not taking regular payments
- P53Z – a P53Z form should be completed if you have withdrawn all your pension and also receive other taxable income
- P50Z – a P50Z form should be completed if you’ve withdrawn all your pension, but have no other taxable income.
Those who do not want to use the online service, can fill out a form on-screen, print it off and post it to HMRC, or print off and fill in a form by hand. HMRC says you should receive a refund of your overpaid tax within 30 days.