PENSIONERS could be owed money by HMRC as new figures show tens of thousands have been overcharged.
Anyone who takes money out of a workplace or personal pension as a lump sum from age 55 could be owed money back.
New figures from HMRC today show more than £57million was refunded in overpaid pension tax in the second quarter of 2024.
More than 16,000 claims were processed in total between April and June this year, the data shows.
It works out that the average reclaim payment was £3,540 a pensioner.
However, how much you overpaid could be higher or lower based on individual circumstances.
This is the third highest figure ever recorded and follows 13,000 claims and £42million refunded in the previous quarter.
You can start taking cash from a defined contribution (DC) scheme or personal pension when you reach 55.
Usually, you can take the first 25% of your pension tax-free, and then anything after that is taxed at the usual income tax rate.
But people who take large one-off lump sums on their first withdrawal from these types of pensions are taxed at an “emergency” higher rate of income tax.
This leaves retirees facing huge sums deducted from their payouts, temporarily leaving them out of pocket.
Almost £1.3billion has now been reclaimed by people overtaxed on pension withdrawals since 2015.
Experts say the current figures are “worryingly” high and it is vital pensioners make sure to claim their cash back.
Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers, with the latest official figures revealing almost £1.3billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back.
“Worryingly, the average reclaim per person spiked to £3,540 during the latest quarter, the third highest three-month figure on record.”
Tom says that the “true” overtaxation number will likely be substantially higher.
In particular, those who are on lower incomes and are less familiar with the self-assessment system might be less likely to go through the official process of reclaiming the money they are owed.
As a result, they will be reliant on HMRC to sort it out for them.
“It is simply unacceptable that, almost a decade on from the introduction of the pension freedoms, the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill,” he added.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown also said that it’s inconceivable, that people are being taxed on their first pension withdrawal.
She said: “Many of these people will not have been expecting this and will have had a nasty shock when their tax bill was way higher than expected.
“This can cause them huge problems: a tax nightmare is not the way to start your retirement.”
HERE's what you need to know about pensions auto-enrolment:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 in the current tax year. This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.
Tom explained that this means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, landing hard-working savers with shock tax bills often 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 first withdrawal will likely be left out of pocket.
If you’ve withdrawn a large amount from your pension pot, you need to fill in a form to get your cash back as quickly as possible.
You can wait for HMRC to review your tax code at the end of the tax year and it will process a refund, but obviously, this means you could be waiting a while.
To get the cash back faster, you can fill in one of three forms: a P55, P53Z or a P50Z which can all be found on the Government’s website.
Which form you need to fill out will depend on how you have accessed your retirement pot:
To avoid having emergency tax deducted in future, try taking smaller amounts out rather than one lump sum.
Helen said: “The reason for the overtaxing is that you can be put on an emergency rate of tax whereby HMRC treats it as though that first payment will be repeated every month.
“You can try to mitigate this by making your first pension withdrawal a small one if possible. If you do get caught out, be sure to take swift action by filling out a form and getting your money back as soon as possible.”
Provided you fill out the correct form HMRC says you should receive a refund of any overpaid tax within 30 days.
WE round-up the main types of pension and how they differ:
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