It’s alarming news for hard-working pension savers: a strange twist in the tax system has mistakenly taken £61 million more than it should have. The Express had the scoop on this unfair tax trap and what you can do if you’ve been caught out.
In the span of just July, August, and September, savers had to reclaim a staggering £61 million because they were overtaxed on their pension withdrawals. This is the most significant amount to be reclaimed in any three-month period since records began. Shockingly, the average person got back up to £3,252 after facing an inflated tax bill.
Why is This Happening?
Since 2015, HMRC (Her Majesty’s Revenue and Customs) has had a peculiar way of taxing the first flexible withdrawal a person makes in a tax year. They use what’s called a ‘Month 1’ basis. In simple terms, it means they take one’s usual yearly tax allowance, split it into 12 parts, and then apply one of those parts to the withdrawal. This often results in savers getting hit with an unexpected and usually larger tax bill.
And here’s the twist: if you withdraw multiple times a year, HMRC will likely correct this for you. But if you only make one withdrawal, there’s a good chance you’ll end up paying too much tax.
Experts are calling this a “ludicrous quirk” of the system and are raising concerns that more savers are getting affected.
The Current Climate
With the ongoing cost of living crisis, more senior savers are choosing to pull money from their pensions. But because of this tax oddity, many are confronted with inflated tax bills.
Tom Selby, a top dog in retirement policy at AJ Bell, didn’t mince his words. He said it’s plain “unfair” and “ridiculous” that folks have to jump through hoops to get their money back, especially during such challenging financial times. He criticised the government for not updating the tax rules, even though people can now access their pensions flexibly from age 55.
What’s The Real Impact?
While the £61 million reclaimed sounds like a lot, the actual amount overtaxed is probably even bigger. Especially vulnerable are those on lower incomes who might not be familiar with the process to claim back their overtaxed amount. If they don’t act, they have to hope that HMRC will sort things out for them.
Avoiding The Tax Shock
Tom Selby shared a tip for savers: consider making a small ‘notional’ withdrawal first. This way, when you make a larger withdrawal next, HMRC might tax it correctly. Alternatively, you can fill out specific HMRC forms to claim your tax back. If all else fails, HMRC should correct the tax by the year’s end.
Claiming Your Overpaid Tax
For those who get a regular pension income, HMRC should adjust things automatically. But if you’ve made just one withdrawal, you need to take action:
- Working or on Benefits? If you’ve emptied your pension pot and are still working or getting benefits, use form P53Z.
- Not Working or on Benefits? If you’ve taken out all your pension and aren’t working or on benefits, use form P50Z.
- Partially Accessed Your Pension? If you’ve only taken out part of your pension, use form P55.
Once you’ve filled out the right form, you should get any overpaid tax back in about 30 days.
In these testing times, it’s crucial to be informed. Make sure you’re not left out of pocket because of a tax system blip.