HMRC repays over £25m in overpaid tax on flexible pension withdrawals in Q4 2020

HMRC repaid £25,766,055 in overpaid tax on flexible pension withdrawals in Q4 2020, the government’s latest Pension Schemes Newsletter has revealed.

This represents an approximately £13.6m decline in the amount of overpaid tax issued back to savers in comparison to Q3 2020, when £39.4m was repaid.

A total of £2.4bn was withdrawn flexibly by 360,000 savers in Q4, compared to £2.3bn withdrawn by 347,000 individuals in Q3.

Since pension freedoms were introduced in 2015, savers have reclaimed a total of £693m in overpaid pension tax.

"There remains a serious flaw in the pension tax system which in all likelihood has left hundreds of thousands of people lumbered with a shock overtaxation bill since April 2015," stated AJ Bell senior analyst, Tom Selby.

“This approach was painful before the pandemic hit but now risks adding extra financial hardship to those who are forced to dip into their retirement pot to make ends meet.

“To give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC. In the same year, over 600,000 people flexibly accessed their retirement pot for the first time.

“While those who took a regular income should have had their tax code adjusted automatically, anyone who didn’t will have been overtaxed.”

Between 1 October 2020 and 31 December 2020, HMRC processed 4,663 P55 forms, 2,515 P53Z forms and 841 P50Z forms.

The government’s newsletter noted that the figures for Q1 2021 will be published in April 2021.

The newsletter also highlighted new regulations for qualified recognised overseas pension schemes (QROPS) in Gibraltar following the UK’s exit from the European Union (EU).

Although Gibraltar was not an European Economic Area state, it was treated as one by virtue of the Treaty on the Functioning of the EU and was not subject to the overseas transfers charge.

The government has amended regulations to ensure that recognised transfers, or onward transfers, to a QROPS established in Gibraltar are treated in the same way as they were before the UK left the EU.

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