Written by Tom Selby, head of retirement policy at AJ Bell
The Government’s approach to the taxation of pension withdrawals is a quiet scandal that risks exacerbating the cost-of-living crisis for tens of thousands of savers.
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.
This means the Revenue 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.
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.”
How to get your money back
If you are taking a steady stream of income via drawdown then you shouldn’t need to take any action, as HMRC will adjust your tax code to ensure that over the course of the year you are taxed the correct amount.
However, if you make a single withdrawal then you will either need fill out one of three forms or rely on HMRC putting you in the correct position at the end of the tax year.
Which form you need to fill out will depend on how you have accessed your retirement pot:
- If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
- If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z,
- If you’ve only flexibly accessed part of your pension pot then use form P55.
Provided you fill out the correct form HMRC says you should receive a refund of any overpaid tax within 30 days.
Source: AJ Bell analysis of HMRC statistics
Source: AJ Bell analysis of HMRC statistics
