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20/04/17Thousands of pensionsers overpaid tax, are you one of them

If you took advantage of the pensions freedoms introduced in 2015, then you may be entitled to a tax refund.

Tens of thousands of people have been overcharged due to a quirk in the tax system, according to research from AJ Bell. The overpayments are estimated to be several million pounds, and there are many people who not only haven’t reclaimed their tax, but are completely unaware that they have been overcharged.

How has this happened?

The overpayment is due to the way that H M Revenue & Customs (HMRC) handles the taxation of pensions. The current rules state that the pension provider is required by HMRC to apply an emergency tax code and calculate the tax on a ‘month 1’ basis. This means that the withdrawal is interpreted as a monthly transaction by the tax system, when in fact it will probably be a one-off event.

Put simply, if somebody were to take £10,000 out of a pension pot, HMRC would assume that they were doing this every month, so the tax would be calculated on the equivalent of £120,000 at the end of the year.

How much tax is being overpaid?

A breakdown by AJ Bell shows various examples of predicted overpayments, resulting in:

  • A withdrawal of £2,000 being taxed at £216.40 instead of £0
  • A withdrawal of £5,000 being taxed at £1,099.46 instead of £0
  • A withdrawal of £10,000 being taxed at £3,099.46 instead of £0
  • A withdrawal of £15,000 being taxed at £5,178.56 instead of £798
  • A withdrawal of £40,000 being taxed at £16,428.56 instead of £5,798

Somebody withdrawing £10,000 to stay under the £11,500 personal allowance would expect to pay no tax, but the quirk in the system would see them pay £3,099.46 instead.

Senior analyst at AJ Bell, Tom Selby, commented: “HMRCs insistence that an emergency tax code must be applied to pension freedom withdrawals means tens of thousands of people will have paid too much tax on their withdrawals, yet very few of them have reclaimed this tax. This might be because they don’t know they have paid too much tax or the process to reclaim it just seemed too complicated. Whatever the reason, there is likely to be millions of pounds sat with HMRC that could be legitimately reclaimed. It is up to individuals to check whether they have paid too much tax and to make a claim, they are unlikely to get any help from the Government.”

There are a number of ways in which overpaid tax can be reclaimed. These depend on a number of things, such as personal circumstances and the nature of the withdrawals.

Some pension providers may pay you back automatically. If this isn’t the case, HMRC should post you a P800 tax calculation in September with either online refund instructions, or a cheque. If you think that you may be entitled to a tax refund but haven’t received a P800 tax calculation, HMRC advises filling out the following forms:

  • Form P50Z: If the payment used up your pension pot and you have no other income in the tax year
  • Form P53Z: If the payment used up your pension pot and you have other taxable income
  • Form P55: If the payment didn’t use up your pension pot and you’re not taking regular payments (this form can only be used if your pension provider can’t refund you).

Information about the forms can be found online here or can be requested by phone on: 0300 200 3300.