HMRC repays £134m in overpaid pensions tax in 2022; complexity concerns persist

HMRC repaid a total of £45,026,065 in Q4 2022 to people who overpaid tax when they flexibly accessed their pensions, the latest government Pension Schemes Newsletter has revealed, pushing the total repayments for the year up to £134m.

According to analysis of HMRC's figures by AJ Bell, this means that savers have now reclaimed a total of £970m in overtaxation on pension withdrawals since pension freedoms were introduced in 2015.

The repayments in Q4 marked an increase from the £33,088,782 repaid in Q3 2022, also marking a year-on-year increase from the £42,188,885 paid out in the same period in 2021, with AJ Bell's analysis suggesting that this was the highest Q4 figure on record.

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 the latest government Pension Schemes Newsletter revealing that HMRC processed a total of 14,335 during the period, including 8,496 P55 forms, 4,170 P53Z forms, and 1,669 P50Z forms.

Quilter head of retirement policy, Jon Greer, highlighted the overpayments as demonstration of the "confusing nature of our pension taxation system", arguing that the cost-of-living pressures has increased the need to find a solution "right now".

He stated: "Although down slightly from 2021’s £142m, today’s figures show £134m was repaid to savers in 2022 in overcharged tax. This works out at an average of £3,215 per claim made.

“Despite pension freedoms having come in around eight years ago, the way HMRC taxes lump sum withdrawals from pensions has never caught up and leaves people receiving less than they expected from their pension withdrawal.

“Particularly in a time of cost-of-living pressures, a solution to this clunky quirk needs to be found as right now the burden is being unduly placed on savers to not only recognise they are out of pocket, but then require them to fill out paperwork if they want their money back immediately.”

Canada Life technical director, Andrew Tully, also stressed the need for change, stating: "Almost eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around pension withdrawals which would mean HMRC is not processing refunds of over £40m in just a three month period, and close to £1bn since 2015.

“For customers making a pension withdrawal for the first time, a workaround is to initiate a small withdrawal of say £100.

"That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals. That will result in the tax being taken at source being far more accurate in many more cases, reducing the paperwork but equally importantly the customer receiving a more accurate withdrawal.”

AJ Bell head of retirement policy, Tom Selby, also warned that "depressingly, the true scale of the issue is likely much higher" as many of those who have been overtaxed will not go through the official process of reclaiming the money they are owed.

“It is ridiculous the tax system operates in this way and scandalous that the government has done nothing to address it almost eight years since the pension freedoms were introduced," he stated.

More broadly, HMRC’s Pension Schemes Newsletter also confirmed that, from April 2023, pension schemes will no longer be able to compile and submit any new event reports for the tax year 2023 to 2024 onwards on the Pension Schemes Online service, and will instead need to migrate their pension scheme and submit the report on the Managing Pension Schemes service.

However, HMRC confirmed that there will be a period between April 2023 and summer 2023 where pension scheme administrators and practitioners will be unable to create and compile an event report for 2023 to 2024 on either service.

HMRC is therefore expected to provide further updates and guidance on what to do during this period in future newsletters.

Alongside this, HMRC confirmed plans to introduce the functionality to submit a pension scheme return on the Managing Pension Schemes service.

As part of this, the questions on the pension scheme return are expected to change and more detail will be required, in some cases including details of members and certain transactions that have taken place during the period of the return.

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