Home Business NewsBusiness Pension freedoms overtaxation approaches £800 million

Pension freedoms overtaxation approaches £800 million

by LLB Reporter
29th Oct 21 10:49 am

New figures from HMRC reveal £794 million has now been repaid to people overtaxed on retirement withdrawals since the pension freedoms were introduced in April 2015.

Between July and September 2021 almost £45 million was repaid to savers, with an average reclaim of £3,352.
Issue occurs because HMRC insists savers flexibly accessing taxable income from their retirement pot for the first time are taxed on a ‘Month 1’ basis.

This means their usual tax allowances are divided by 12 and applied to the withdrawal – meaning people could be hit with shock tax bills running to thousands of pounds.

Those who only make one withdrawal in the tax year need to fill out one of three HMRC forms in order to get their money back.

Tom Selby, head of retirement policy at AJ Bell, comments: “Savers accessing their pension need to be aware that HMRC will apply an emergency ‘Month 1’ tax code to their first withdrawal, meaning they will initially be overtaxed – potentially by thousands of pounds.

“While those taking a regular income should have their tax code adjusted automatically, anyone making a single withdrawal in the tax year will need to fill out one of three HMRC forms to get their money back within 30 days.

“If they don’t, they will need to wait to the end of the tax year, when HMRC says they should receive a rebate.

“The Government is looking at increasing digitisation in the administration of pension tax relief as part of the Budget. Policymakers should use this opportunity to assess the current approach to the taxation of pension freedoms withdrawals.

“At the moment savers risk being left out of pocket to the tune of thousands of pounds when they access their retirement pot. If this process could be automated and the need to fill out a complex reclaim form removed, it would significantly improve the tax system for retirees.”

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