HMRC hands back record £54m in tax on pension freedoms withdrawals

A record £54m was repaid to savers who were overtaxed on pension freedoms withdrawals in the three months to September 2019, new figures from HMRC have revealed.

The quarterly figure is the highest since pension freedoms were introduced in April 2015, and has taken the total to £535m which has been repaid to investors who have filled out the official reclaim forms.

When an individual withdraws money from their pension, under current tax rules, HMRC makes assumptions about how many more withdrawals they will make over the rest of the financial year. By assuming that an individual might make several withdrawals, HMRC assumes that people will often go into the 40% tax band – therefore taking a large chunk of tax from the withdrawal.

Insurance company, Royal London, pointed at the latest repayment figures to suggest this will often be a false assumption. Individuals in this instance, however, must then fill in one of three different forms to get their money back, or wait until the end year tax return process.

Royal London director of policy, Steve Webb, said: “Even by their own low standards, HMRC have outdone themselves in the last three months, taking more than £54m of savers’ money in income tax to which they were not entitled.

“It cannot be right that tens of thousands of people each year have too much tax taken out of their pension and then have the hassle of filling in a form to get back money that is rightfully theirs.

“Whoever ends up running the country after the General Election needs to tell HMRC to stop this practice as a matter of urgency.”

Royal London also added that the Government’s own Office for Tax Simplification (OTS) has called on HMRC to review the process of applying ‘emergency’ tax codes to pension withdrawals, but noted that so far, HMRC has refused to act.

AJ Bell senior analyst, Tom Selby, added: “Given most people don’t fill out these forms, this is almost certainly the tip of a sizeable iceberg. It is time for the Government to accept that, while the retirement flexibilities introduced in April 2015 have been well received by savers, the tax system that sits alongside them is simply not fit for purpose.

“People risk being left short of money as a result of HMRC’s approach and forced to either take out more cash from their pension, potentially paying extra tax in the process, or seeking the funds from elsewhere.

“This is a particular problem if someone has earmarked the withdrawal for something specific, such as helping their child buy a house or paying for long-term care for an elderly relative. Savers struggling to make ends meet as a result of being overtaxed could even be forced into the arms of a high cost lender.

“At the absolute bare minimum, the Government needs to urgently review its approach to the taxation of pension freedoms withdrawals, which has never been consulted on formally.

“Its failure to do this so far represents a serious failure of policymaking which will inevitably have caused people distress and potentially significant financial hardship.”

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