Pension savers across the country could be due a rebate after new HMRC figures show that some have been wrongly taxed after drawing from their pension pots. Hundreds of thousands of people have been overcharged in tax since new pension rules were introduced back in 2015.
As you may already know, pension freedoms gave savers more control and allowed pensioners over 55 to withdraw money from their pots whenever they like.
Under the rules, the first 25% of withdrawals are tax free, while the remaining 75% is added to taxable income for the year.
Since changes were introduced, more than £37 billion has been taken out of pensions savings.
The Sun claims that the overpaid tax comes primarily from cases where savers were still working. HMRC wrongly applied emergency tax on the first 25% of withdrawals that it has incorrectly categorised as additional earnings.
Pension savers who make larger, inconsistent withdrawals are at a much higher risk of being emergency taxed. While pension freedoms allow over 55s to access their retirement savings more flexibly, they certainly increase your chances of falling foul of the taxman.
Of the £627 million, the taxman has paid back £27 million in overpaid tax during lockdown according to Which?. The average amount that each person received was £3,560. This was an £845 increase on payouts during the previous quarter.
Think you might have overpaid? Here’s how you can claim
There are three ways you can claim back overpaid tax on the government’s refund website.
If you haven’t withdrawn your entire pension and aren’t taking regular payments, you can claim using a P55 form.
If you have withdrawn your entire pension and receive other taxable income, you should fill out the P53Z. And if you have withdrawn your entire pension and have no other taxable income, you should fill out the P50Z.
HMRC are yet to clarify what form savers who haven’t withdrawn their full pension but do take regular payments should fill out. Hopefully, they will do so in the near future. If you would like any more information about your pension savings, please get in touch.