The latest figures from HMRC revealed that between July and September 2024, the tax office paid out £44.2million back to 12,000 people who paid tax on their pension when first accessing it
Thousands of pensioners have been given a £3,600 payout from HMRC after paying too much tax on their pensions.
The latest figures from HMRC revealed that between July and September 2024, the tax office paid out £44.2million back to 12,000 people who paid tax on their pension when first accessing it. This works out as an average payout of £3,691 per person.
The issue of pension tax overpayments has been around for a few years and is related to new pension freedom rules introduced in 2015. Under the rules, you can withdraw up to 25% of your defined contribution pension savings as income tax-free from the age of 55, and then you’re charged your normal income tax rate on the remaining 75%.
However, those who dip into their funds for the first time risk being charged an “emergency rate” level of tax. This is because HMRC treats this withdrawal as if you will continue to have this income every month—even if you do not make any more withdrawals. Many retirees have been caught out when making a large one-off first withdrawal and taking smaller regular amounts thereafter.
Jon Greer, head of retirement policy at Quilter, says the recent figures show that this continues to be a “substantial issue” as Brits look to ease their financial pressures by withdrawing from their pension savings. He added: “What’s particularly concerning is that we may see a sharp rise in withdrawals in the next set of data, driven by growing anxieties surrounding the upcoming budget.
“With persistent rumours and the government’s rhetoric pointing to a ‘painful’ fiscal event, many savers may take unplanned action to take tax-free cash from their pension pots, fearing potential changes to pension taxation.”
Jon says the current tax system has “inherent flaws” and places a “heavy burden” on British retirees as the PAYE system struggles to accommodate the way pensions are accessed. He added: “It is vital that those considering pension withdrawals amid these budget rumours seek professional financial advice. A rush to take money out could result in unnecessary tax liabilities, and careful planning is essential to avoid making decisions that might compromise their retirement plans. Advisers can help structure withdrawals effectively, ensuring savers do not fall foul of the tax system’s pitfalls.
“Until the system is changed, we are likely to continue seeing many savers caught out and forced to reclaim significant sums of money.”
How can I claim my overpaid pension tax back?
If you are taking a steady stream of income through the pension drawdown then you shouldn’t need to take any action as HMRC will adjust your tax code to ensure that over the course of the year, you are taxed the correct amount.
If you do just make a one-off withdrawal, then you have a couple of options. The easiest option is to wait for HMRC to put you in the correct position at the end of the tax year when you file your self-assessment. After a review of your tax return, HMRC will see that the emergency tax code has been issued and will return the money to you.
However, the con of this is you could be waiting a long time to get your cash back, which isn’t ideal for people who need the money sooner rather than later. Another option you can take is to claim it back yourself. To do this, you will need to fill out one of three different forms – which will depend on how you have accessed your retirement pot and your personal circumstances:
- P53Z form – If you’ve emptied your pension pot and are still working or receiving benefits
- P50Z form – If you’ve emptied your pension pot and aren’t working or receiving benefits
- P55 form – If you’ve only accessed part of your pension pot
You can get these forms on GOV.UK, and you can fill out these forms online or send them in the post. If filled out correctly, HMRC says you will get your tax refund within 30 days.
