Under existing rules providers are required to charge ‘Month 1’ emergency tax the first time someone uses the pension freedoms to access their retirement pot.
This means people who make a single flexible withdrawal from their fund in a tax year receive 1/12th of their usual tax allowances.
The pensions industry has been pressing for the Revenue to revisit its approach, while the Office of Tax Simplification (OTS) recently warned rules governing the taxation of pension freedoms withdrawals are poorly understood by consumers.
Despite this, HMRC said in a recent update it will not revisit the policy (see HMRC June Pension Schemes Newsletter, point 7 - https://www.gov.uk/government/publications/pension-schemes-newsletter-100-june-2018/pension-schemes-newsletter-100-june-2018
Tom Selby, senior analyst at AJ Bell, comments:
“This is a disappointing stance from HMRC when you consider that people withdrawing their pension have been overtaxed by hundreds of millions of pounds over the past few years. While almost £300 million has been repaid to savers since the pension freedoms were introduced, many more who didn’t fill out the required forms will have been left short-changed for up to a year.
“By continuing to overtax people who use the pension freedoms as the Government intended, HMRC risks pushing people into financial difficulty and forcing them into taking out more than they need to, potentially creating an extra tax liability as a result.
“HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating. The current system was introduced without consultation and leaves millions of savers at risk of being hit with a shock tax bill.
“At the very least we need a public consultation on HMRC’s approach to determine whether the current approach can be improved for the benefit of savers.”
How to make a reclaim
How people make a claim for any overpaid tax depends on the nature of the withdrawals they have made from their pension and their personal circumstances.
The Government website states:
If the payment used up your pension pot and you have no other income in the tax year, fill in form P50Z.
If the payment used up your pension pot and you have other taxable income, fill in form P53Z.
If the payment didn’t use up your pension pot and you’re not taking regular payments, fill in form P55. You can only use this form if your pension provider can’t refund you.