HMRC will keep forcing pensioners to pay tax that they don’t even owe

Every year, around 10,000 pensioners are forced to pay on average £3,000 each in tax to HMRC unnecessarily. Incredibly, some have had to hand over as much as £55,000.

They then have to go through the rigmarole of either claiming it back or waiting for a refund long after the tax year is over.

Incredibly, the scandal has been going on since 2015, with pensioners paying a staggering £1billion worth of tax in total since then, completely unnecessarily.

That money belongs to them all along, but due to a “quirk” in HMRC systems, they have to hand it over anyway

Despite criticism, the taxman won’t change course. Pensioners face unnecessary tax bills again and again, because HMRC is reluctant to upgrade its systems.

Almost 10,000 individuals a year cough up when taking advantage of “pension freedom” rules, introduced in 2015.

These allow the over-55s to take one-off lump sums from their workplace or personal pension defined contribution plans.

Withdrawals are taxed if total earnings for the year exceed the £12,570 personal allowance. But HMRC applies an emergency tax code on the money, and that’s where the trouble starts. 

HMRC assumes the person will continue taking the same amount every month for the entire financial year.

It will do this even if they have absolutely no intention of taking any further withdrawals.

This nonsense has to stop. HMRC has had almost nine years to put it right.

Pensioners will get the overpaid tax back in the end. They can apply for a refund by filling out one of three different HMRC forms, depending on how they accessed it.

Alternatively, they can wait for HMRC to put things straight when reviewing its tax codes at the end of the financial year.

In the 2022/23 tax year, the 100 biggest refunds averaged £54,185, a Freedom of Information request by Royal London found. 

Some 2,300 claimed more than £10,000. The average overall was £3,062.

Growing numbers are falling foul of the rules each year as cost-of-living pressures force more people to dip into their pensions.

Royal London pension expert Clare Moffat said the HMRC bill can come as a huge shock, especially if someone had earmarked the money for a specific purpose such as a holiday or home improvements.

“Suddenly, a big chunk of the money they thought they had coming to them has in fact gone to pay emergency taxes, which they probably hadn’t anticipated.”

Moffat said cases of pension savers charged more than £50,000 are “extreme”. “To trigger a tax bill of this size, they will have taken out a lump sum in excess of £200,000.”

READ MORE: Pensioners hit by ‘emergency’ retirement tax of £55,000 each

Rosie Hooper, chartered financial planner at Quilter Cheviot, said pensioners continue to be caught in an outdated system that imposes too much tax initially and then makes them wait too long to get back what they’re owed.

“The emergency tax code can be really frustrating if you need that money quickly then are left waiting for a tax refund. It’s an odd quirk of the PAYE system that needs streamlining.”

Hooper said the complex system makes it harder to access pensions flexibly, undermining pension freedoms. 

To reclaim the tax, use P50Z if the payment used up your pension pot and you did not work or receive benefits that tax year. Form P53Z is for those who used up their pension and are working or getting benefits. Those who flexibly accessed just part of their pot should complete form P55.

Andrew Tully, technical services director at Nucleus Financial, suggested a potential get-round. “It is possible to avoid a large tax bill by making a small initial withdrawal of around £100. That will generate a tax code from HMRC which your pension provider will apply to any subsequent withdrawals.”

A spokesman for HMRC said: “Nobody overpays tax as a result of taking advantage of pension flexibility. 

“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.”

Yet it would surely be a lot simpler if they didn’t have to pay the tax unnecessarily in the first place.



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