Thousands could get £3,200 back due to overtaxing, check if you're eligible
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Pensioners are being urged to check if they have been overtaxed.
People in the UK have overpaid tax on their pensions and are due big repayments, according to recent reports. Since reforms were introduced in 2015, the policy has been to tax the first flexible withdrawal a person takes during the tax year on a 'Month 1' basis.
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This means the tax officials divide a person's usual tax allowances by 12 and apply this to the withdrawal. For those who make several withdrawals or get a regular income, this will usually be put right automatically. However, those who make just a single withdrawal may then overpay their tax.
More under this adMore under this adNew data from the Government shows that over 12,000 tax repayment claims were filed over the last three months of 2023.Over £38.7million was paid out to pensioners, meaning there was an average reclaim of around £3,200 if each claim was successful.
Pension tax overpaid in 2023
Whilst you may have already accessed your 25% tax-free cash, the issue has arisen when you take taxable cash out of your pensionpot for the first time. In many cases HMRC has not given the pension provider a tax code and the provider has to deduct income tax using an emergency tax code.
More under this adMore under this adThis means HMRC assumes you will make the same withdrawal every month for the next 12 months and not just the one you have made. For example, if you withdraw £10,000 in April, HMRC then wrongly assumes you will make the same withdrawal every month for the next year and tax you accordingly.
The latest official figures show that between January and March in 2023, HMRC processed 15,800 tax refund claims to people who had accessed their pensions early. The amount refunded back by HMRC totalled £48.5million for the same three month period, according to Money Saving Expert.
More under this adMore under this adTom Selby, director of public policy at AJ Bell, said that 'in particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.'
How to claim back overpaid tax
To claim the overpaid tax back, people should either make a claim themselves or wait for HMRC to review the self-assessment payments and then issue a refund. The exact amount you can claim back depends on how much money you took from your pension and also what other income you have, which will impact your tax rate.
More under this adMore under this adHMRC are looking into the issue and should get around to resolving it for everybody involved but it can often be several months before the emergency tax has been corrected.
If you want to make a claim the following links will take you to a form depending on your personal circumstances:
- Emptied your pension and have no other income in that tax year? Use: P50Z
- Emptied your pension but have other taxable income that tax year? Use: P53Z
- Haven't emptied your pension pot? Use: P55
An HMRC spokesperson was keen to play down the issue stating last year, as per The Mirror:
Nobody overpays tax as a result of taking advantage of pension flexibility.More under this adMore under this ad
We will automatically repay anyone who pays too much because they’re on an emergency tax code. Individuals can claim back any overpayment earlier if they wish.
Read more:
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Sources used:
- The Mirror 'Hundreds of thousands of pensioners overtaxed by £1BILLION - but you can claim money back'
- Money Saving Expert 'Reclaim overpaid pension tax'