HMRC pays back £1bn in tax on pension withdrawals

In an update today (April 26), HMRC revealed that from January to March 2023, 15,856 people successfully claimed back a total of £48.5mn in overpaid tax on flexible withdrawals.

This was the highest Q1 figure on record and second highest of any three-month period since April 2015. 

However, adding up all the quarterly figures since 2015 took the total overpaid tax – which has been refunded - on flexible pension withdrawals to around £1.018bn since pension freedoms were introduced.

Andrew Tully, technical director, Canada Life, said the latest HMRC numbers just show how complex the tax position around pension withdrawals is.

“Eight years on from the introduction of the pension freedoms there must be a better way to administer the tax position around flexible pension withdrawals which would mean HMRC is not processing refunds to the tune of £1bn,” he said.

“A good tip for those customers making a pension withdrawal for the first time, is to initiate a small withdrawal of say £100. 

“That will generate a tax code from HMRC which the pension provider will apply to any subsequent withdrawals. 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.”

Source: AJ Bell analysis of HMRC statistics

Under current rules, when an individual first takes money out of their defined contribution pension they are often charged at an ‘emergency’ tax rate, with the duty then being on the saver to claim back overpaid tax by filling in one of three forms.  

In addition to money repaid by HMRC to those who fill in a claim form, there will be some savers who didn’t fill in a form and eventually get a tax refund when they fill in their tax return.  

Steve Webb, partner at LCP explained that HMRC does not publish figures for the numbers in this group but this does mean that the total amount of over taxation is likely to be significantly above the reported figure of £1bn.

“This is an absolute disgrace,” Webb said. “A system based on systematic over-taxing of pension savers cannot be right. 

“There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place. 

“And we are not talking about small sums, with over £1bn being paid back by HMRC so far. Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury.”

In total, HMRC has re-paid the following:

Tax years

Source: Canada Life