HM Revenue & Customs has returned more than £61mn in overpaid tax to savers who accessed their pensions in the third quarter of 2023.
In figures published today (October 26), HMRC said between July 2023 to September 2023, it had processed 18,851 pension flexibility forms.
From this, it had repaid £61.3mn to people who had been charged emergency tax when they withdrew money from their pension pot.
This is an increase of £5mn from the second quarter when HMRC said it had repaid £56.2mn.
Ian Cook, chartered financial planner at Quilter, said staggeringly, this is almost double Q3 2022, which came in at £33.1mn.
“In Q3 2023, the average tax refund per saver was £3,252 due to the incorrect amount of tax being charged from pension income,” Cook said.
“HMRC has seen a significant 89 per cent increase in the number of claim forms processed compared to Q3 2022, illustrating how many more people are turning to their pension pots to help them get by compared to last year.”
Under pension freedom rules people aged 55 plus can freely access their cash.
But any withdrawals above the 25 per cent tax free amount are taxable at an individual's marginal rate of income tax.
Where the provider does not have the correct tax code - which is in the majority of cases - withdrawals are taxed using a higher rate emergency tax code.
This routinely results in an excessive tax deduction that has to be reclaimed later.
There are three forms - P55, P53Z and P50Z - that allow people to claim back money mid-way through the tax-year.
Cook said many people are still stuck with an archaic system that over-taxes them and leaves them waiting for a long period before they can access the full amount owed.
“This is because they are placed on an emergency tax code when they first withdraw from their pension pot, which is particularly frustrating for those trying to access their funds quickly,” he said.
“Often people do not understand why this has happened given it arises due to an oddity within the PAYE system.
“The figures starkly illustrate the pressure the cost-of-living crisis is placing on everyday finances, with more people choosing to access their pension funds flexibly as a result.”
He explained that to avoid this emergency tax, it is best for individuals to speak to a financial planner who can reduce the risk of paying excessive tax upfront that needs to be reclaimed.
“You can achieve this via several smaller withdrawals, as opposed to an initial lump sum,” he added.
“This ensures that most of the withdrawal utilises an updated tax code, preventing emergency taxation on the full amount.
“This has been an issue for years and the system needs an overhaul. The current process is leaving an increasing number of people facing emergency tax at a time they need their money most.”
sonia.rach@ft.com
