The government must reform the “absurd” tax over-pay and reclaim system for pensions, as new HMRC figures show over £280m has been repaid since pension freedoms was introduced, Royal London director of policy Steve Webb has said.

Webb made the comments after the government published its latest Pension Schemes Newsletter yesterday, 3 May 2018, in which it said £22.5m of tax reclaim was paid in Q1 2018.

According to Royal London, most pensions withdrawals are taxed using an ‘emergency’ tax code resulting in excessive tax reduction.

Webb 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.”

HMRC said that over 10,000 people submitted tax reclaim forms for their pension flexibility payments, with 6,218 filling in P55, 3,448 filling in P53Z, while 988 filled in P50Z forms.

“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 It is time to move to a simple system where basic rate tax is withdrawn at source and any adjustment is made through end year tax returns”, Webb added.

Last week HMRC released statistics which found that almost £1.7bn was flexibly withdrawn in Q1 2018, a 7 per cent increase on Q1 2017.

The total number of payments made in the first quarter of this year hit 500,000, made to 222,000 individuals, and means that almost £17.5bn has been withdrawn by one million people since the introduction of pension freedoms in April 2015.

AJ Bell senior analyst, Tom Selby, also urged the government to review its policy and said that the overtaxation is likely to be higher than the figures quoted by the government, due to people not filling out the forms.

He said: "HMRC’s insistence on overtaxing people on their first pension freedoms withdrawal runs counter to the reforms and risks causing unnecessary financial hardship to millions of people.

“While it is good that over £300m has now been repaid to savers through the official forms, the reality is most people who are overtaxed do not fill out these forms and so rely on HMRC to reimburse them – a process that could take months."

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