New figures published today by HMRC reveal that the total number of claims for overpaid tax on pension withdrawals has now gone over half a million since the introduction of Pension Freedoms in 2015.
Where people first take money out of a Defined Contribution or ‘pot of money’ pension, they are often taxed on the basis of an ‘emergency’ tax code, which effectively assumes that they will make large numbers of withdrawals in the rest of the tax year.
In many cases this results in more tax being withdrawn from the pension payment than is necessary. The overpaid tax will eventually be paid back as part of the end year reconciliation process, but people who want their money back sooner have to fill in one of three forms to get the money back. According to consultants LCP, the total number of such claims since the start of this system now stands at just over 502,000, whilst the total amount repaid is just under £1.5bn.
The system has come under repeated criticism for the way in which it routinely over-taxes people and forces them to claim a refund, including by the now-abolished Office for Tax Simplification. But the system has remained fundamentally unaltered since it was introduced a decade ago. Now LCP partner and former pensions minister Steve Webb has renewed his calls for reform.
Steve Webb said: “How much longer will all of this go on? Ten years on from the introduction of Pension Freedoms, tens of thousands of people each year are still having to fill in forms to claim back overpaid tax on their pensions from HMRC. This is a system designed for the convenience of the tax office, not the taxpayer. Given that most people in retirement pay tax at the basic rate, it would not be difficult to have a system which got things right for most people most of the time, rather than making over-taxing people part of ‘business as usual’. It is time to that the whole system was simplified and made more predictable for pension savers looking to draw on their pensions”.
