HMRC repays over £22m in overpaid pensions tax in Q1 2022

HMRC repaid a total of £22,317,529 in Q1 2022 to people who overpaid tax when they flexibly accessed their pensions, the latest government Pension Schemes Newsletter has confirmed.

This represents a year-on-year decrease of just under £1m on the £23,183,421 repaid in Q1 2021, and a fall of around £20m compared to Q4 2021, when £42,188,885 was repaid.

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.

People reclaiming overpaid tax must fill in one of three forms, with HMRC processing 4,693 P55 forms, 1,903 P53Z forms and 816 P50Z forms between 1 January and 31 March 2022.

The newsletter also revealed that HMRC received 1,591 applications to register new pension schemes for 2021 to 2022, representing an 89 per cent decrease since 2012 to 2013.

Of the schemes that applied for 2021 to 2022, 79 per cent have been registered, 13 per cent were refused registration and no decision had been made on the remaining 8 per cent.

Commenting on the figures, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, said: “Pension freedoms have been in place for several years now and the issue of overpaid tax has always been a problem, yet we continue to see thousands of people overpaying by hundreds of millions of pounds every year.

“There must be an easier way for people to be able to access their hard-earned pension cash without being clobbered by tax that they then need to work out how to reclaim. It’s a real fly in the ointment of the pension freedoms that have been embraced by society.

“The data shows HMRC processed over 7,400 forms in the last quarter alone – over the entire pension freedoms period this must mount up to way over 100,000 applications as people reclaim their own money. It must come as anything from a nasty shock to those who aren’t expecting it, to annoyance and inconvenience for those who do.

“Pension freedoms are embedded into the retirement landscape now and it is time the system was reformed to reflect changed behaviours and make it easier for people to access their pensions.”

Quilter head of retirement policy, Jon Greer, added: “Due to clunky systems, HMRC repaid pension savers over £22m in the first quarter of 2022, which amounts to an average of £3,011 per saver as a result of the incorrect amount of tax being charged from pension income. This comes on top of more than £142m of overpayments last year.

“This emergency tax is due to a little understood quirk of the PAYE system when people start to take money from their pension. Year-on-year overpayments have remained broadly the same with £23m repaid to pensioners in Q1 2021, which increased considerably throughout the year as more pension savers dipped into their pension.

“While HMRC will make a repayment automatically, it could take some time so it is best to make a repayment claim yourself to avoid waiting. Working alongside a professional who knows and understands the system will reduce the risk of lost income being handed to the tax authorities or, if it is taken, then helping your reclaim it speedily and effectively.”

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