Her Majesty’s Revenue & Customs (HMRC) has been forced to repay £38 million for excess tax levied on pension withdrawals in just three months.
Data released by HMRC shows that there have been 18,353 successful applications for overpaid tax between July 1st and September 20th and the average refund was £2,000.
This is just the latest occurrence of over taxation with the total reclaimed since the start of pension freedoms in April 2015 reaching £372.5 million.
Any pension withdrawal above the 25% tax free threshold is taxed at the marginal rate of the taxpayer, but when HMRC has insufficient information emergency tax is levied and can be reclaimed later.
Tax expert Tom Selby said: “In reality the vast majority of people who are overtaxed aren’t filling out the official reclaim forms, meaning the amount of emergency tax paid by savers will be much higher than this official figure.
“For those who access their pension for specific purposes such as paying down debt or funding care for an elderly relative, receiving potentially thousands of pounds less than they expected could present a very real financial challenge.”
The correct procedure for reclaiming the overpaid tax requires the completion of whichever of the three possible forms which best covers their personal situation.
Pensions expert Ian Browne said: “It is astonishing that HMRC have failed to address the problem and are still forcing people to fill out time consuming paper work to simply get their money back.
“This antiquated system is begging to be modernised to account for this new retirement landscape.”
But HMRC have refused to change the system, despite pleas from the Office for Tax Simplification and representatives of the pension industry.
A spokesman said providers should ensure the tax code of their client is up to date, adding: “We have reviewed the PAYE process for lump sums taken under the pension flexibility rules where the emergency tax code is applied.
“We concluded that any changes would not significantly improve the tax position for the majority of recipients. The existing treatment remains the most effective method in these cases.”
Former pensions minister Sir Steve Webb was scathing in his criticism of the system.
He said: “HMRC must be rubbing its hands with glee as taxpayers are forced to fork out millions of pounds in unnecessary tax on pension withdrawals, all for the administrative convenient of the government.
“The scale of over-taxation seems to be increasing, with £38 million having to be paid back in the latest quarter. There must be a better way than the current system where taxpayers have to fill in one of three forms to claim back the tax that they should never have had to pay in the first place.”
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Pensions expert Ian Browne added: “This is the largest amount repaid for any quarter since freedoms were introduced and these staggering figures continue to make a mockery of pension freedoms as it shows HMRC are simply unable to cope with the new measures even though they have been in place for over three years. And remember, these figures only acknowledge those who have filled out official tax reclaim forms.
“It is astonishing that HMRC have failed to address the problem and are still forcing people to fill out time consuming paper work to simply get their money back. This antiquated system is begging to be modernised to account for this new retirement landscape.”