Thousands of over 55s have overpaid millions in tax after drawing money from their retirement savings under flexible access pension rules.
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The mandarins at HM Revenue & Customs resolutely refuse to change the rules, which has left taxpayers fuming for paying too much income tax which they then have to claim back.
Although HMRC says repayments should only take 30 days, many take much longer if mistakes are made during the application process.
The latest data from HMRC reveals that 1.113 million savers have withdrawn £25.62 billion in 6.1 million transactions from their pensions under the flexible access rules, which came into force in April 2015.
The problem for many savers is HMRC taxes the withdrawals as Month 1 payments instead of considering your personal allowances.
This led to 12,500 savers reclaiming £31.1 million in overpaid tax in the first three months of 2019 – and £433 million repaid since the start of pension freedoms.
How the sums work
Assuming the 25% tax-free amount has already been taken, this means if a retirement saver decides to take £50,000 from their pension, the provider must apply emergency tax. This arrangement means any personal allowance and tax due is divided by 1/12.
So instead of applying the full annual personal allowance of £12,500, only 1/12 of the amount is considered – £1,042.
Then, the next £3,125 is taxed at 20%, the next £9,375 at 40% and the rest at 45%.
For example:
- Payment from flexi-access drawdown (after 25% tax-free amount)£50,000
- Less 1/12 personal allowance£1,042
- Amount taxed under PAYE£48,958
- Tax @ 20% on first £3,125£625
- Tax @ 40% on next £9,375£3,750
- Tax @ 45% on remaining £36,458£16,406
- Total tax deducted£20,781
Source: Low Income Tax Reform Group
Claiming the tax back
Reclaiming income tax depends on your tax status.
If you are in the PAYE system and complete a tax return, you can reclaim the overpaid tax through your tax return.
Other taxpayers should file a:
- Form P50 if they take all the money and have no other income other than the state pension
- Form P50Z if all the money is taken from a pension and they have no other income
- P53Z ifall the money is taken from a pension and they have other PAYE income
For retirement savers only drawing part of their pension pot, HMRC will accept a claim on a Form P55.
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