'Trap' in tax system wrongly overcharging people thousands of pounds

A 'trap' in the tax system means HMRC is wrongly overcharging people thousands of pounds for drawing cash from their pensions, experts have warned.

Under rules introduced in April 2015, anyone aged 55 or over can take regular or ad hoc sums from their pension pots. Using the assumption that they have no other income, they can withdraw up to £11,850 a year - the current annual personal allowance - without having to pay income tax on it.

However, unless the pension provider has an up-to-date tax code for you, it is obliged to impose an "emergency rate" of tax on any withdrawals of more than £987.50. This is a twelfth of the £11,850 allowance, as it assumes you will make the same withdrawal every month.

According to latest calculations by AJ Bell, while a £10,000 withdrawal, for example, should be tax-free - again, assuming no other income - if HMRC applied emergency tax the bill would be more than £3,000.

Someone withdrawing £50,000 could end up paying £12,000 more than they need to, the company added.

The average overpayment is £2,420.

    Share Story:

Recent Stories


A changing DC market
In our latest Pensions Age video interview, Aon DC senior partner and head of DC consulting, Ben Roe, speaks to Laura Blows about the latest changes and challenges within the DC sector

Being retirement ready
Gavin Lewis, Head of UK and Ireland Institutional at BlackRock, talks to Francesca Fabrizi about the BlackRock 2024 UK Read on Retirement report, 'Ready or not. How are we feeling about retirement?’

Podcast: Who matters most in pensions?
In the latest Pensions Age podcast, Francesca Fabrizi speaks to Capita Pension Solutions global practice leader & chief revenue officer, Stuart Heatley, about who matters most in pensions and how to best meet their needs
Podcast: A look at asset-backed securities
Royal London Asset Management head of ABS, Jeremy Deacon, chats about asset-backed securities (ABS) in our latest Pensions Age podcast

Advertisement Advertisement