HMRC, the government department that collects taxes, has had to refund £57 million to people who were wrongly charged on their pension withdrawals in the last three months. This means they’ve handed back over £1.3 billion since 2015!
Why Are People Being Overcharged?
The problem stems from the way HMRC calculates tax on pension withdrawals. They use a “higher-rate emergency tax code” which means they treat your lump sum as if you’re going to take out that amount every month. This often means you’re pushed into a higher tax bracket than you should be.
Example: If you take out £5,000, they treat it as if you’re going to withdraw £60,000 for the year, even if you actually earn less than the £12,500 personal allowance, where you wouldn’t need to pay tax.
What Can You Do?
If you’ve taken money out of your pension, it’s important to check if you’ve been overcharged. You can claim back the overpayment if you’ve been charged the wrong tax.
The Problem is Bigger Than We Think
The £57 million refunded is just the tip of the iceberg. There are likely many people who haven’t even realised they’ve been overcharged and haven’t claimed back their money.