The tax body has issued £48.7 million in refunds between April 1 to June 30 for overpaid tax on pension withdrawals
Pensioners could be owed as much as £3,800 in tax refunds. If you have accessed a lump sum of your pension, it is possible you could have overpaid in tax.
Figures from HM Revenue and Customs (HMRC) reveal the tax authority handed back £48.7 million in refunds between April 1 and June 30 for pension withdrawal overpayments. Retirement specialist Helen Morrissey said the data suggests approximately 13,000 refund applications were dealt with during this period, with the typical refund amounting to roughly £3,800.
According to the Daily Record, Ms Morrissey highlighted that people taking a lump sum from their pension for the first time can face excessive taxation. The primary cause is that HMRC’s system incorrectly assumes the identical sum will be taken out each month, potentially resulting in an unforeseen tax demand.
Nevertheless, the head of retirement analysis at Hargreaves Lansdown pointed out the funds can be recovered from HMRC, though it can prove to be an “admin headache”. Ms Morrissey said: “The overpaid pension tax saga continues to drag on. In just three months, HMRC has repaid a whopping £48.7m to people who paid too much tax for simply accessing their pension.
“With an average refund of around £3,800, these refunds amount to a significant chunk of change. The problem hits people who are taking a lump sum from their pension for the first time.
“They get taxed on what is known as a ‘month 1’ basis, which means it’s treated as though the same amount will come out every month. This results in a far bigger tax bill, which can come as an unpleasant surprise or even de-rail people’s retirement plans.”
The pension expert stated: “The money can be reclaimed. HMRC processed close to 13,000 forms between the beginning of April and the end of June, but it’s an admin headache that people can well do without. Ten years on from the advent of Freedom and Choice it’s a process that should have been consigned to history.”
Ms Morrissey also offered advice on how to sidestep an unexpected tax bill. She advised: “There are things you can do to mitigate it. For instance, you could make your first pension withdrawal a relatively small one.
“However, if you were looking to take a lump sum to fund travel or home renovations, for instance, you will need to plan ahead to make sure the money you take isn’t whittled away by tax which could delay your plans.
“If you do get clobbered with a big tax bill, then you will need to fill out one of three forms so that HMRC can process the refund. Otherwise, you can wait until the end of the tax year.”
