Record £198m in overpaid pensions tax repaid in 2023/24 tax year

HMRC repaid a total of £42m to people who overpaid tax when they flexibly accessed their pensions in Q1 2024, with a record £198m in overpaid pensions tax repaid in the 2023/24 tax year, the latest government Pension Schemes Newsletter has revealed.

According to the update, HMRC repaid a total of £42,003,943 from 1 January 2024 to 31 March 2024, with an average tax refund per saver of £3,167, meaning that more than £1.2bn has now been reclaimed by people overtaxed on pension withdrawals since 2015.

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 update revealing that HMRC processed a total of 13,261 forms during the period, including 8,378 P55 forms, 3,865 P53Z forms, and 1,018 P50Z forms.

Whilst the repayments in Q1 marked a fall on the £38m repaid in the previous quarter, and a year-on-year fall from the £48.5m repaid in Q1 2023, it takes the total tax repayments for the 2023/24 tax year to over £198m, marking a new record high for any one tax year.

Canada Life pension, tax and estate planning specialist, John Chew, highlighted the latest updates as evidence that, almost a decade on from the introduction of the pension freedoms, the tax system continues to “catch people out”.

“Although the overpaid tax on pension withdrawals can be reclaimed using one of the various forms available, the data shows record amounts of tax continues to be overpaid,” he continued. “There must be a better way of managing these withdrawals, especially if people are targeting a specific reason to use the money and find themselves short due to emergency tax being applied.”

This was echoed by from Quilter chartered financial planner, Ian Cook, who argued that those needing access to their pension funds are faced with an “archaic system that over-taxes them and leaves them waiting unnecessarily before they can access the full amount they are owed”.

“For those who need to access their funds quickly, this can present a significant hurdle,” he continued.

“This has caused a significant issue for those who are accessing their pension funds for years and has been exacerbated by the strain that the cost-of-living crisis has had on people’s finances over the last year or so.

“The system is desperately in need of an overhaul as, at present, the process is leaving people facing unnecessary emergency tax and adding additional strain at a time when many are still struggling with the cost of living.”

Industry experts have repeatedly raised concerns over these issues, with some warning that the true over-taxation number will likely be substantially higher, as HMRC does not publish figures for those savers who didn’t fill in a form and instead get a tax refund when they fill in their tax return.

Indeed, AJ Bell director of public policy, Tom Selby, warned that, in particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed, and could be reliant on HMRC putting their affairs in order.

“It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days," he added.

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