Savers have now reclaimed £925 million in overtaxation on pensions withdrawals since 2015, AJ Bell analysis of HMRC data reveals.
More than £33 million was repaid to almost 10,000 people overtaxed on pension withdrawals in July, August and September, new figures show, with an average reclaim of £3,324.
Overtaxation 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 your 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: “Millions of savers who have accessed their retirement pot in line with the rules rightly expect the Government to take the correct amount of tax from their withdrawal.
“However, HMRC’s approach to the taxation of pensions withdrawals continues to be a quiet scandal that risks exacerbating the cost-of-living crisis for tens of thousands of savers. As inflation tightens its grip on UK households, forcing many to turn to their retirement pots to make ends meet, the problem will likely get worse over the next 12 months.
“Since 2015, the Revenue has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.
“This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, landing hard-working savers with shock tax bills running into thousands of pounds.
“While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket.
“The damage has been colossal, with a staggering £925 million reclaimed through the official channels so far. In the third quarter of 2022 alone more than £33 million was reclaimed by almost 10,000 people, with an average reclaim of more than £3,300.
“The true figure is likely much higher as many of those who have been overtaxed – in particular people on lower incomes who are less familiar with the self-assessment process – will not fill in one of these forms.
“It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. If you don’t, you are left relying on the efficiency of HMRC to repay you at the end of the tax year.
“This approach was bad enough before, but with inflation spiking and millions of Brits struggling to make ends meet, it feels particularly cruel.”