HM Revenue and Customs (HMRC) has repaid £48.7 million in overpaid tax on pension withdrawals between April 1 and June 30, according to official figures. The average refund amounted to roughly £3,800, with approximately 13,000 applications processed during the period.
The overpayments occur when individuals take a lump sum from their pension for the first time. HMRC's system treats the withdrawal as if the same amount will be taken every month, applying a 'month 1' tax basis that often results in a higher tax bill than necessary.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, described the situation as an 'admin headache' that should have been resolved years after the introduction of pension freedoms. She noted that the problem can derail retirement plans if not addressed promptly.
To avoid unexpected tax bills, Morrissey suggested making the first pension withdrawal relatively small. Those who have already overpaid can reclaim the money by submitting one of three specific forms to HMRC, or wait until the end of the tax year for an automatic adjustment.
