Royal London Director of Policy Steve Webb is calling for reform to the way pension withdrawals are taxed, as new HMRC figures show that tax over-payments since the start of pension freedoms have now reached more than £280m.
The latest ‘Pension Schemes Newsletter’ published this week shows that in the first quarter of this year more than £22m had to be repaid where too much tax had been collected by HMRC from those making ‘flexible’ withdrawals from their pension savings. This takes the running total since the start of the new system in April 2015 to around £285m. In most cases withdrawals are taxed using an ‘emergency’ tax code which routinely results in an excessive tax deduction which then has to be reclaimed.
The latest figures are also a reminder of the complexity of the process, with no fewer than three different forms to choose from in order to claim back the tax. These are:
- Form P50Z for those whose withdrawal empties out their pension pot and who have no other taxable income;
- Form P53Z for those whose withdrawal empties out their pension pot but who have other taxable income;
- Form P55 for those whose withdrawal leaves a balance in the fund but is not a regular withdrawal.
Most refunds are on form P55 (6,218 in the last quarter), followed by form P53Z (3,448) and then form P50Z (988). In all over 10,000 people had to claim back overpaid tax in the last quarter.
Commenting, Steve Webb, Director of Policy at Royal London said:
"These quarterly figures are a regular reminder of the absurd way in which pension withdrawals are taxed. HMRC is perfectly happy to over-tax tens of thousands of people each year and make them jump through hoops, having to choose between three different forms to complete and then wait to get their money back. This is a system run for the convenience of HMRC, not the taxpayer. It is time to move to a simple system where basic rate tax is withdrawn at source and any adjustment is made through end year tax returns."
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Note to editors
Information on the process for reclaiming over-paid income tax on flexibly withdrawn pension payments can be found here: https://www.gov.uk/claim-tax-refund/you-get-a-pension
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.