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HMRC repays £36m in overcharged pension tax

HM Revenue and Customs has repaid just over £36m to people who withdrew part of their pension but were overcharged on their tax bills in the last quarter.

Nearly ten per cent of those taking a flexible payment from their pension between July and September made a reclaim, with the average amount coming in at £2,300.

The likes of former pensions minister Steve Webb have recently been campaigning for reform of HMRC’s pension tax administration. Currently, defined contribution pension withdrawals are not taxed on a cumulative basis each month like pay-as-you-earn taxes are, so savers will be taxed as if they made the same withdrawal each month of a year, even if they chose to reduce withdrawals or space them out, unless their provider has a tax code to use for them.

Steve Webb: Bizarre pension tax rules are costing freedoms savers

Hargreaves Lansdown head of policy Tom McPhail says: “In theory HMRC processes mean even if you don’t fill in the form and immediately reclaim overpaid tax, you should eventually get the money back. The problem is HMRC isn’t infallible: if you don’t take the initiative and ask for the money back, you risk missing out; at best you’ll miss out on the use of the money for up to a year.

“This is a clumsy system which is certainly not designed with the best interests of the investor at its heart. HMRC and pension providers should be able to request the appropriate tax code in advance of making any payment, the technology is there to do this kind of thing.”

The HMRC data released yesterday also shows that a further £1.59bn was accessed from pensions in the third quarter of 2017, a fall from £1.86bn the previous quarter, but more individual payments were made.

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Hear, hear. HMRC SYSTEMS AND PROCESSES are not fit for purpose and it is about time somebody got hold of them.

  2. It’s not quite accurate to say that those cashing out their pension funds have been overcharged on their tax bills. Rather, the amount of tax deducted at source has qualified for a partial refund. I imagine that providers point out to recipients why tax at emergency rate has been deducted at source and that if they submit the appropriate form to HMRC they should be able to reclaim any excess. If they don’t bother to do so, that’s their lookout.

    As I’ve pointed out elsewhere, the idea that only basic rate tax should be deducted at source and that, to get the balance, HMRC should then have to go after people who aren’t in the habit of submitting a SA tax return (those on PAYE may well have never done one) would be unrealistically cumbersome and costly.

  3. Maybe advisers should tell clients to take a one off ad hoc minimal payment – say £100 to get the tax coding sorted before they take a larger sum. We all know that the system is squiffy so we can find ways to work around it.

  4. And pray tell why advisers don’t do a tax computation prior to any withdrawals to ensure that the amount withdrawn falls into the lowest possible tax band?

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