Are You Owed Money From a Surprise Bill? Pension Tax Refunds Reach £1.2 Billion

Retirees have been receiving a substantial refund from the government, with almost £1.2 billion in overpaid tax being returned since the implementation of pension freedom rules. While this is positive news for those affected, it also raises concerns for individuals who may face unexpected tax bills.

According to HMRC, the latest data shows that over £38 million has been reclaimed due to overtaxation on pension withdrawals between October and December 2023. More than 12,000 reclaim forms were processed during that quarter, with an average reclaim of £3,216, bringing the total amount of refunds for overtaxed withdrawals close to £1.2 billion since 2015.

Tom Selby, director of public policy at AJ Bell, has cautioned that the actual number of overtaxed withdrawals could be much higher than reported. He highlighted that individuals on lower incomes, who may not be familiar with the self-assessment process, may not go through the official procedure of reclaiming the owed money. Consequently, they will have to rely on HMRC to rectify their affairs.

The introduction of pension freedom rules in 2015 is one of the root causes of overtaxed pension withdrawals. While these rules provide retirees with more flexibility in accessing their pension funds without having to buy an annuity or enter drawdown, they have resulted in a flaw in the tax system. When making a withdrawal from a pension, the tax system divides the usual tax allowances by 12 and applies them to the withdrawal, potentially leading to higher tax obligations for those making a single withdrawal.

To prevent overtaxation on pension withdrawals, savers are advised to carefully consider how they access their pension funds. Those planning to take a single withdrawal in a tax year can avoid a substantial tax bill by taking a notional withdrawal first or by completing the appropriate HMRC forms to claim back the overtaxed amount.

While the process of recovering overpaid tax may involve significant administration, completing one of three HMRC forms will ensure that tax is returned within 30 days. Failure to complete the forms will result in individuals having to wait until the end of the tax year for any potential refund.

It is crucial for retirees and other pension recipients to stay abreast of the latest tax rules to avoid being caught off guard by unexpected tax bills, particularly with more people having access to their pensions at an earlier age. Seeking advice from a financial advisor or tax professional is advisable to ensure that pension withdrawals are conducted correctly, thereby avoiding undue tax obligations.

In conclusion, it is imperative for retirees and individuals planning to withdraw from their pensions to be mindful of the potential pitfalls that may lead to overtaxation. By staying informed and proactive in completing the necessary HMRC forms, savers may be able to avoid being struck by an alarming tax bill.

This article was written by Marc Shoffman, an award-winning freelance journalist specialising in business, personal finance, and property. His work frequently appears in print and online publications, providing valuable insights to individuals seeking sound financial advice.