HMRC repaid £36.9m in flexible pension tax overpayments in the last quarter; an increase from the previous quarter’s total of £26.8m. These are HMRC’s own figures from their newsletter.
Why are so many people overpaying tax on their pension payments?
This is the question being asked across the financial sector. Basically, if you take a large payment from your flexible pension in one month, this will probably be ‘emergency’ taxed instead of taxed at your marginal rate. This extra tax is not lost forever, but you need to actively apply to HMRC for its repayment.
Considering the almost £37m repayment so far, it is safe to assume that this is not limited to one or two taxpayers. According to HMRC’s calculations, it is 8% of all flexible payment users from 1st July to 30th September this year.
UK non residents
Another section of the UK tax paying population that often overpays tax on their pension income is UK non residents. Not living in the UK and still paying UK tax on pension income can mean you overpay tax. Tax relief is often available depending on your level of income and if the UK has a double taxation treaty with the country you are living in.
What is the solution?
The general consensus is that changes to administration regulations are crucial to improve both efficiency and usability of the flexible pension system. These latest figures from HMRC are excellent supporting evidence.
Currently, it relies on the individual taxpayers to submit an application to have their extra emergency tax repaid. It is possible that they could lose the money entirely, if they do not apply within HMRC’s deadlines. Simply streamlining the system to solve this basic problem could cut out this whole step in the process; saving both taxpayers and HMRC the additional paperwork.
As reported by Citywire, Head of Policy at Hargreaves Lansdown, Tom McPhail said, “HMRC and pension providers should be able to request the appropriate tax code in advance of making any payment, the technology is there to do this kind of thing. In theory HMRC processes mean even if you don’t fill in the form and immediately reclaim overpaid tax, you should eventually get the money back. The problem is HMRC isn’t infallible: if you don’t take the initiative and ask for the money back, you risk missing out; at best you’ll miss out on the use of the money for up to a year.”
Royal London insurers are also supporting a change to the ‘freedom’ flexible pension scheme to prevent pensioners being over taxed. They have submitted this expert opinion to the Work and Pensions Select Committee inquiry into pension freedom, which started this month.
Always check your figures
Until HMRC resolves this recurring problem, keep an eye on your own pension payments and, if you have any issues with the tax you have paid, get in touch and we’ll take a look. We specialise in supporting higher rate tax payers and UK non residents with reclaiming the pension tax relief they are owed. Remember, it’s your responsibility to submit a claim to get back any emergency tax you have paid and it’s always best to do that sooner, rather than later.
