HMRC repays 'eye-watering' £44m in overpaid pensions tax in Q3

HMRC repaid an "eye-watering" £44,659,174 in overpaid tax on flexible pension withdrawals in Q3 2021, with an average reclaim of £3,352, the government’s latest Pension Schemes Newsletter has revealed.

This represents a more than £5m year-on-year increase in flexible pension withdrawal tax repayments from HMRC, with a total of £39.4m repaid in Q3 2020.

The tax repayments on flexible withdrawals are necessary as HMRC applies an emergency 'month 1' tax code on the first withdrawal, which can lead to an initial over-taxation.

“While those taking a regular income should have their tax code adjusted automatically, anyone making a single withdrawal in the tax year will need to fill out one of three HMRC forms to get their money back within 30 days," AJ Bell head of retirement policy, Tom Selby, explained.

“If they don’t, they will need to wait to the end of the tax year, when HMRC says they should receive a rebate.

Commenting on the latest figures, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, added: “People drawing money from their pensions have been overcharged an eye-watering £44 million. And this isn’t some kind of horrible mistake by the taxman, it’s how the system is intended to work.

"Given the ongoing popularity of the freedom and choice reforms it’s an administrative nightmare that should have been sorted long ago.

"Instead people must navigate a complex system filling out various forms to get their hands on their money.

"This is a system ripe for reform and given the government recently confirmed its intention to invest in improving how pension tax reliefs are administered we must hope they will also look to bring this system out of the dark ages.”

Indeed, Selby also noted that the government recently announced plans to increase digitisation in the administration of pension tax relief as part of the Budget.

"Policymakers should use this opportunity to assess the current approach to the taxation of pension freedoms withdrawals," he said.

“At the moment savers risk being left out of pocket to the tune of thousands of pounds when they access their retirement pot. If this process could be automated and the need to fill out a complex reclaim form removed, it would significantly improve the tax system for retirees.”

The newsletter also confirmed that it has extended a number of easements introduced amid the pandemic, including APSS105 relief at source repayment claims, until 31 March 2022.

In addition to this, it announced that the ability for scheme administrators to view a list of pension schemes they need to migrate on to the managing pension schemes service, which was previously delayed, will be available mid-to-late November.

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