HMRC pension tax alert as retirees over-contributed by more than £3,000 each

Pensioners who overpaid their tax on their first withdrawal have clawed back more than £1.2billion a decade on from when the flexible withdrawals policy came in.

Repayments in the 2023/2024 tax year hit a record £198million, with the average reclaim in the first quarter of 2023 worth £3,167.

But experts at AJ Bell warned the actual overtaxation figure could be much larger. Tom Selby, director of public policy, said: "Depressingly, the true overtaxation number will likely be substantially higher.

"In particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.

"It is simply unacceptable that the Government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days."

Have I been overtaxed on my pension?

Tax rules introduced in 2015 mean HMRC taxes the first flexible withdrawal on a 'Month 1' basis.

This means the tax authority calculates the tax rate based on a person's usual tax allowance divided by 12, and then applies this to the withdrawal amount.

Those who get a regular income or who make several pension withdrawals during a tax year should be put right automatically but those who only make a single withdrawal could end up overpaying.

How can I get my tax refund on my pensions?

You can get you money back within a 30-day window by filling out one of three forms, either the P55, P53Z or P50Z forms.

Otherwise you are relying on HMRC to repay you at the end of the tax year.

Mr Selby shared a tip for those planning to make a single withdrawal, to avoid being overtaxed.

He said: "One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first.

"This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.

"Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days. If you don’t do this, the revenue says it will put you back in the correct tax position at the end of the tax year."

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