HMRC repays over £42m in overpaid pensions tax in Q4 2021

HMRC has repaid an estimated £835m in overpaid tax on flexible pension withdrawals since pension freedoms were introduced in 2015, after the latest government Pension Schemes Newsletter confirmed that HMRC repaid £42,188,885 in Q4 2021.

The represents a more than £16m year-on-year increase in flexible pension withdrawal tax repayments from HMRC, with a total of £25,766,055 repaid in Q4 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.

However, LCP partner, Steve Webb, argued that "it is a disgrace that ordinary savers who want to access their pension savings flexibly are routinely overtaxed and then forced to claim back this excess tax".

"HMRC’s approach is to tax first and ask questions later," he continued. “This ‘money merry-go-round’ where people have large amounts of tax deducted and then have to claim back some of it has gone on long enough.

"The system is run purely for the administrative convenience of HMRC rather than the benefit of taxpayers."

In light of this, Webb argued that it would be "much fairer" to deduct basic rate tax from pension withdrawals and then adjust the amounts paid if this did not give the right answer, rather than overtaxing thousands of people every month.

Industry experts have previously urged the government to address the "serious flaw" in the pensions tax system, warning that the issue has left hundreds of thousands of people with a shock over taxation since 2015.

AJ Bell head of retirement policy, Tom Selby, also warned that the true figure is likely to be significantly higher" than the latest estimates, as this only covers people who fill out one of three official reclaim forms.

“It is beyond belief as the 7th anniversary of the pension freedoms reforms approaches that the tax system continues to operate in this way," he added. "Having introduced flexibility over pension access from age 55, an upgrade of the tax system is now long overdue.”

Alongside the update on tax repayments, the newsletter confirmed that the government has again extended the Covid-19 easements on obtaining wet signatures until 31 March 2024, whilst all other temporary changes for relief at source will end on 31 March 2022.

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