HM Revenue and Customs (HMRC) has had to reimburse nearly £5.7million to people who paid too much tax when first accessing their pension, new figures show.
The latest data on Pension Flexibility reveals that between April 1 and June 30, a significant £56,925,219 million was refunded.
This overpayment occurs because HMRC sometimes applies an emergency tax rate, assuming that a lump sum withdrawal will be taken as a regular monthly income.
Analysts have slammed the tax method, warning it could create “huge problems” for people and their finances.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “More than nine years after pension freedoms, it is inconceivable to think that people are still being overtaxed on their first pension withdrawals.
“Almost £57million has been overpaid in the most recent quarter alone. Many of these people will not have been expecting this and will have had a nasty shock when their tax bill was way higher than expected.
“This can cause them huge problems: a tax nightmare is not the way to start your retirement.”
Ms Morrissey noted: “Of course, you can get a refund – either by waiting until the end of the tax year or filling in one of a number of forms known as the P55, P53Z or P50Z, but this is a complication many people do not need and it’s a situation that should have been resolved years ago.
“The reason for the overtaxing is that you can be put on an emergency rate of tax whereby HMRC treats it as though that first payment will be repeated every month.”
However, Ms Morrissey urged: “You can try to mitigate this by making your first pension withdrawal a small one if possible.
“If you do get caught out, be sure to take swift action by filling out a form and getting your money back as soon as possible.”
Those who find they’ve been overtaxed can reclaim their money by filling out one of three forms—P55, P53Z, or P50Z. Refunds are paid directly into the claimant’s bank account, or people can opt to wait until the end of the tax year for a refund.
An HMRC spokesperson said: “Nobody overpays tax as a result of taking advantage of pension flexibility.
“We will repay anyone who pays too much because they’re on an emergency tax code. Individuals can claim back any overpayment earlier if they wish.”
