In the last quarter of 2021, HMRC paid £ 42 million to overcharged pensioners using the Pension Freedom Rules.
How does the Pension Freedom System work?
In 2015, Pension Freedom was introduced to give pensioners the flexibility to use their pension money more freely. With a defined contribution pension, people over the age of 55 are able to take up to 25% of their pension as a single amount, tax-free. The rest of their pension is taxed at the normal rate of their income tax.
Why have people been charged extra tax on these pension payments?
Between September and December 2021, 13,000 people applied for a refund of their overcharged pension tax bill. The average bill issued was £ 3,230 and included expatriates living outside the UK. No matter what financial position you are in, this is a significant amount.
Why would this extra charging happen?
Pensioners automatically pay HMRC income tax before sending a single penny to their customers. Pensioners do not have the correct tax code for you and that is why heavy taxes are often levied on the first handful of payments due to the emergency tax applicable to pensions.
This emergency tax code is known as ‘month 1’. It works on the assumption that you will receive the same unit amount each month and that you will have to pay tax as per your annual income. So instead of looking at it as an off-payment, it multiplies it by 12 and calculates the corresponding tax bill. Although not more than 25% of the total tax-free amount.
What can you do about it?
You can either wait for the end of the tax year, when HMRC settles their books and automatically finds any tax extra payments they find. Or you can recover an additional payment using one of three forms:
What does HMRC say about this situation?
A spokesman for HMRC said: “Taking advantage of pension flexibility will ensure that no one pays extra taxes. Individuals may demand any additional payment due to the immediate application of the Emergency Tax Code and we will pay it within 30 days.
“Anyone who does not claim will be paid automatically at the end of the year.”
Which is great news because no one loses indefinitely.
But some people think that this is a noise in the system that HMRC should fix. Steve Webb, a former pension minister and LCP partner, said: “It’s a shame that ordinary savers who want to access their pension savings flexibly are regularly taxed and then forced to claim this extra tax refund. Taxing and then questioning.This ‘Money Merry-Go-Round’ where people have been deducted a lot of taxes and then have to claim some refunds has gone on for a long time. “It would be more fair to deduct the basic rate tax from pension withdrawals and then adjust the amounts paid, instead of overtaking thousands of people every month.”
This could save thousands of pensioners a lot of time if HMRC removes an additional administrator to make a claim for additional charges. But it is a relief to know that pensioners are automatically reimbursed if they are unable to submit their claims themselves.
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