In the period from April to June 2024, HMRC dealt with over 16,000 pension refund requests, with an average amount of £3,540 being refunded to pensioners.
This is third-highest amount ever recorded being returned to pensioners with the process of claiming pension tax refunds an ongoing issue for taxpayers and HMRC.
It has been reported that HMRC has already paid out more than £56 million in the second quarter of 2024 to retirees who were overtaxed, with an amount of £1.3 billion being successfully retrieved by individuals who were overtaxed when making pension withdrawals since 2015 when, pension freedoms were introduced.
A pension tax rebate typically occurs when an individual withdraws money from their retirement funds often arising when a retired person first accesses their pension and is subject to a higher emergency tax rate.
This is an ongoing issue which we highlighted in our 24/25 tax year pension rebate article that can bring some pensioners a considerable degree of distress and burden an already overworked HMRC at the same time.
Helen Morrissey, pension specialist at Hargreaves Lansdown, told Birmingham Live: “More than nine years after pension freedoms, it is inconceivable to think that people are still being overtaxed on their first pension withdrawals.
“Almost £57 million has been overpaid in the most recent quarter alone. Many of these people will not have been expecting this and will have had a nasty shock when their tax bill was way higher than expected. This can cause them huge problems: a tax nightmare is not the way to start your retirement.”
What is the reason for overpaying tax on pension withdrawals?
Individuals who have a workplace pension scheme or SIPP are given the freedom to make withdrawals from their savings starting at the age of 55 (which is expected to increase to the age of 57 in 2028).
The government will tax pension withdrawals as income, except for the first 25% which is classed as being tax-free income.
Normally the first withdrawal made in a tax year is taxed by HM Revenue and Customs as if it were the monthly income for the rest of the year with an emergency tax code being used.
Essentially, a one-time withdrawal is treated as if it were a regular monthly income.
Individuals who receive a consistent income or make several withdrawals within the same tax year should have their tax deductions automatically corrected by HMRC.
What steps can retired individuals take to prevent being taxed excessively?
One option that may help prevent being burdened with an excessive amount of income tax being taken from a pension withdrawal is to take out a small amount for your initial pension withdrawal.
This is not an ideal choice for everyone but should enable HMRC to accurately apply the appropriate tax code for any subsequent larger withdrawals.
What is the process for pensioners to receive a tax refund?
In case you are subject to emergency tax, you have the option to either fill out an HMRC form and request a refund of tax, or wait for HMRC to adjust your situation automatically by the end of the current tax year which is the 6 April 2025.
- To claim back tax on a partially accessed pension overpayment, it is necessary to complete the P55 form.
- If the entire pension pot has been accessed in the current tax year and there are no other sources of income for that tax year, the P50Z form should be completed.
- If there is another source of income and you have emptied your pension pot, the P53Z form must be submitted in order to claim a tax refund.
If you would like some free impartial guidance on pensions and retirement you can make use of pension wise which is part of the government backed MoneyHelper.
