HMRC has repaid more than £42million in pension tax overpayment refunds in the first quarter of 2024 after the incorrect amount of tax was charged on pension income.
The average tax refund per saver in the period was £3,167.
Thousands of pensioners have been affected, with more than 13,000 claim forms processed in Q1 2024, new figures show.
HMRC’s PAYE system puts people on an emergency tax code when they first withdraw from their pension pot, which can trigger tax overpayments.
John Chew, pension, tax and estate planning specialist at Canada Life, said: “Almost a decade on from the introduction of the pension freedoms and the latest HMRC update shows the tax system continues to catch people out.”
Ian Cook, chartered financial planner at Quilter, slammed the “archaic system” that leaves people needing to access pension funds necessarily waiting before they get the full amount they are owed.
He added: “This is due to an oddity within the PAYE system which means they are placed on an emergency tax code when they first withdraw from their pension pot.
“For those who need to access their funds quickly, this can present a significant hurdle.”
Those planning to access their pension funds for the first time can take steps to avoid this emergency tax, however.
Cook urged people to speak to a professional financial planner where possible, to reduce the risk of paying excessive tax upfront.
He explained: “You can achieve this via several smaller withdrawals, as opposed to an initial lump sum.
“This ensures that most of the withdrawal utilises an updated tax code, preventing emergency taxation on the full amount.”
Canada Life’s Chew called for a “better way” of managing pension withdrawals, expressing particular concern for people who have a specific reason to use the money and find themselves short due to the emergency tax take.
He also suggested making a small first withdrawal, for instance of £100, could be a “good tip”, as the generated tax code would then apply to subsequent withdrawals.
HMRC’s PAYE system puts people on an emergency tax code when they first withdraw from their pension pot
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“That will result in the tax being taken at source being far more accurate in many more cases, not only reducing the burden of paperwork but equally importantly the customer receiving a more accurate withdrawal in the first place,” Chew said.
“It’s also worth noting that any change in tax position during the course of the year, resulting in a new tax code being issued by HMRC, should also be shared with your pension provider as a matter of course.
“This will help identify any differences in the tax being applied and allow for earlier intervention if required.”
Robert Johnson is a UK-based business writer specializing in finance and entrepreneurship. With an eye for market trends and a keen interest in the corporate world, he offers readers valuable insights into business developments.
