Thousands of people have claimed a refund on emergency tax on pensions after the HM Revenues & Customs (HMRC) overcharged savers an eye watering amount on their withdrawals.
In total, 6,000 people successfully claimed a refund in the 2023-2024 financial year, a 20 per cent increase from the year before, according to figures obtained by insurance company Royal London, through a freedom of information request.
According to the data, around 2,400 individual pension investors successfully claimed back more than £10,000 last year, a year on year increase of four per cent, while 11,700 savers got £5,000 or more back from HMRC.
Clare Moffat, pension expert at Royal London said, “It’s incredible to think that some people withdrawing from their pension for the first time were entitled to emergency tax refunds in excess of £100,000.”
“Not only do these taxes usually come as a massive shock, the unexpected tax amount can also scupper people’s carefully laid plans.”
Eye watering amounts and changes to rules
The average refund per saver was £3,342, up £280 from the previous year, while the top 25 refunds recorded averaged a £106,897.
Many savers were forced to wait extended periods of time before their money was returned to them, due to being made to fill in certain forms before becoming eligible to wait.
However, if the paperwork is not filled in, retirees will need to wait on HMRC reviewing the payments at the end of the tax year, leaving many out of pocket for months.
Changes to pension rules in 2015, allowed people to withdraw some or all of their defined contribution savings as lump sums from the age of 55.
While 25 per cent of pensions normally being tax free, capped at £268,275, the remaining 75 per cent is taxed, with an “emergency” rate being applied in circumstances where no tax code is in place.
This means HMRC tax the amount withdrawn as if that will be the pension saver’s monthly income every month for the rest of that tax year, despite that not being the case.
Tax code problems remain
While, HMRC has recently announced that it will perform an overhaul of its emergency taxing code on pensions, which it promises will guarantee quick returns, it won’t stop people being charged the higher rate, in particular due to the incoming pension changes.
Moffat said, “The recent announcement by the government that pensions will soon be subjected to inheritance tax may have the knock-on effect of triggering a surge in emergency taxes on pensions withdrawals.”
“Looming inheritance tax means more and more people are considering dipping into their pension pots… a rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals.”
“So, the problem of emergency taxes isn’t going away, and there’s a chance it could get worse.”