‘A quiet scandal’: Should HMRC be routinely overtaxing pension withdrawals?
Pardon the Interruption
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Overtaxation on pensions continues, with £33.7m repaid to about 10,000 people between April and June alone, up from £22.3m in the first three months of this year.
New figures from HMRC show the issue of pensions withdrawals being overtaxed means 10,000 people had to reclaim an average of £3,363, as they are taxed based on the amount taken from their pension in the first month. The issue is well known and has been ongoing for some time. Over the April to June period last year, the reclaim figure stood at £33m.
Tom Selby, head of retirement policy at investment platform AJ Bell, called the government’s approach to the taxation of pension withdrawals "a quiet scandal that risks exacerbating the cost-of-living crisis for tens of thousands of savers”.
The rule to tax people on withdrawals made in the first month they access their pot has the worst impact on people who only make a single withdrawal, as HMRC will tax them as if they had taken the same amount in each month.
Is the process too cumbersome?
The process to reclaim any overpaid tax is not straightforward, as there are different forms that may need to be submitted depending on whether a pot was withdrawn in full or in part and whether the account holder is still active in the workforce.
“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,” said Selby.
He added: “This approach was bad enough before, but with inflation spiking and millions of Brits struggling to make ends meet, it feels particularly cruel.”
For pensioners taking a steady stream of income through drawdown, HMRC will adjust their tax code to ensure that over the course of the year they are taxed the correct amount.
Should tax rules for withdrawals be changed?
