Latest Breaking News Online News Portal
Most of us find paying the tax we owe painful enough, but at least we can see the point of it. Paying tax we don’t owe is a different matter altogether.
I’ve spent a fair bit of time pointing out some of the intricacies and idiocies various Chancellors ahve inflicted on taxpayers, with some unlucky souls facing marginal tax rates of up to 96 percent.
In another ridiculous tax quirk, the over-55s have now overpaid more than £1billion of tax on pension withdrawals that they didn’t actually need to pay.
Worse, the collective overpayment is growing by a staggering £16million a month, with no sign it will stop.
In the first three months of this year, HMRC repaid more than £48million to 15,856 people who had been overtaxed on pension withdrawals, the highest on record.
The average overpayment is now £3,062 and while savers should eventually get this money back the system is slow and complicated.
Savers often have to wait until the end of the financial year to get the money refunded, even though it belonged to them all along.
It really shouldn’t be happening, but it is.
Pension experts have variously called it “astonishing”, “scandalous” and “an absolute disgrace”.
Tom Selby, head of retirement policy at AJ Bell, says HMRC has had long enough to cope with 2015’s pension freedom reforms that allowed Brits to access their retirement savings flexibly from age 55.
It certainly has.
Yet eight years later, nothing has been done to make sure they are taxed in a sensible way.
HMRC needs to revamp its arcane systems instead of hitting savers with unfair tax bills, especially today, when people need all the money they can get, as soon as they can get it.
The true cost is actually a lot higher than £1billion as many of those who have been overtaxed do not actively reclaim the tax they are owed, but rely on HMRC to put things right.
Many will be on lower incomes and less familiar with the self-assessment tax return process. Yet they’re the ones who can least afford to wait for cash that’s rightfully theirs.
Happily, pension savers who draw regular monthly income from their retirement savings do not need to take action. HMRC will adjust their tax code to ensure they are paying the right amount.
Yet those who make a single lump sum withdrawal are treated as if they were going to carry on taking that sum every single month for the rest of the tax year.
READ MORE: HMRC makes pension savers pay tax they do not owe
The first flexible pension withdrawal of the tax year is taxed under a ‘Month 1’ emergency tax code, which divides the normal tax allowances by 12 and applies them to the first withdrawal.
Those taking a one-off lump sum are likely to pay far too much tax as a result.
Many don’t even realise they are going to be automatically overtaxed until faced with a shock tax bill.
It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money.
Which form you use depends on how you accessed your money.
Use P50Z if the payment used up your pension pot and you did not work or receive benefits that tax year.
Form P53Z is for those who used up their pension and are working or getting benefits. Those who flexibly accessed just part of their pot should complete form P55.
Simple, eh?
Otherwise you can claim the money back through your self-assessment tax return. Or simply wait.
There has to be a better way to tax pension withdrawals. Whether HMRC can come up with one is a different matter.
There’s a get round for those making their first pension withdrawal. Start by taking a small sum of, say, £100. That will generate a tax code from HMRC which your pension provider will apply to any subsequent withdrawals.
This way tax taken at source will be far more accurate but many don’t realise this is an option and come unstuck.
A Government spokesperson assures me that anyone who overpays due to an emergency tax code being applied will automatically be repaid at the end of the year.
That’s true but why should they have to wait? It’s their money all along.
