HMRC Overtaxed Pensioners Rise: £48.5M Repaid in Three Months
HMRC has witnessed a rise in overtaxed pensioners, with 13,700 claims in just three months, an 11% increase from the previous year. This totals £48.5 million repaid since July, highlighting a persistent issue with the PAYE system and pension withdrawals.
The issue arises due to the PAYE system, not designed for one-off pension withdrawals, leading to overtaxation every quarter. Pension Freedom rules, introduced in 2015, allow those aged 55 and over to access their defined contribution pensions more flexibly. However, taking a large lump sum can push individuals into an 'emergency' higher tax rate. Since 2015, HMRC has repaid over £1.5 billion in overpaid tax on pensions.
To mitigate this, HMRC advises taking a notional withdrawal first to ensure the correct tax code is applied on the second, larger withdrawal. This can help avoid overtaxation. HMRC automatically reviews records at the end of the tax year and sends a P800 calculation if a refund is owed.
The increase in overtaxed pensioners underscores the need for HMRC to address the longstanding flaw in its approach to taxing flexible pension withdrawals. While HMRC has paid back millions, the persistent issue suggests a systemic change is required to prevent overtaxation and ensure pensioners keep more of their hard-earned savings.
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