Savers reclaim £32.7m in overpaid pension freedoms tax

Pension savers reclaimed £32.7m in overpaid tax from their first pension freedoms withdrawals in Q1 2020, according to HMRC data.

The data showed a slight increase on the amount reclaimed compared to Q4 2019, when £32.2m was repaid.

Over 10,000 official reclaim forms were processed by HMRC in Q1 2020, with the average saver being refunded £3,141.

The most recent tax refunds brings the total amount reclaimed from HMRC in overpaid pension freedoms tax up to £600m since April 2015.

AJ Bell explained that savers are getting overtaxed on their first withdrawals as HMRC uses the emergency ‘Month 1’ taxation policy of single withdrawals, meaning those accessing their pensions as a result of Covid-19 risk receiving thousands of pounds less than they may expect.

“While the freedom and flexibility pensions now offer has been welcomed by millions, HMRC’s insistence on applying a ‘Month 1’ emergency tax code to the first withdrawal of the tax year has now seen savers reclaim £600m in overpaid tax,” said AJ Bell senior analyst, Tom Selby.

“It’s worth remembering this only covers those who have made a reclaim using the official forms, and so doesn’t include any people refunded via HMRC’s systems at the end of the tax year.

“Anyone planning to access their pension in the new tax year – including those looking to use their retirement pot to plug an income gap resulting from COVID-19 – needs to be aware of the impact Month 1 taxation will have on the amount of money they receive initially.

“For those taking a regular stream of income, HMRC should automatically adjust your tax code so you receive the right amount in subsequent months.

“However, where you are making a single withdrawal in the tax year you will either have to fill out one of three forms or wait for the revenue to sort out your tax position.”

Pension providers have previously called on HMRC to review its taxation policy on pension freedoms withdrawals, notably when a record £54m was repaid in Q3 2019.

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