Thousands of pensioners across the UK could be due a significant tax refund from HM Revenue and Customs (HMRC) after overpaying on their pension withdrawals.
The Scale of Overpaid Pension Tax
Official data from HMRC reveals that the tax authority refunded a staggering £48.7 million to savers between April 1 and June 30. According to retirement specialist Helen Morrissey, this figure suggests that approximately 13,000 refund applications were processed during this three-month period alone.
The average repayment was around £3,800, a substantial sum that can make a real difference to someone's retirement income.
Why Are People Overpaying Tax?
The core of the problem lies in how HMRC's system handles a first-time pension lump sum withdrawal. The system operates on an emergency 'month 1' tax code, which incorrectly assumes that the individual will be taking the same large amount out every single month for the rest of the tax year.
This technicality results in an inflated and often shocking tax bill, which can derail carefully laid retirement plans for travel or home improvements.
How to Reclaim Your Money
While the money can be reclaimed, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, has described the process as an "admin headache". She expressed frustration that a decade after pension freedoms were introduced, this issue persists.
To get a refund, you typically need to fill out one of three specific forms to alert HMRC of the overpayment. Alternatively, you can wait until the end of the tax year for an automatic reconciliation, though this means waiting for your money.
To avoid the problem entirely, Ms Morrissey suggests making your first pension withdrawal a smaller, nominal amount. This prevents the emergency tax code from being applied to a large sum. However, for those needing a substantial lump sum, planning ahead for a potential large, temporary tax deduction is essential.
