HMRC is to end the “scandalous” practice of over-taxing pension withdrawals and forcing savers to claim refunds.
It has bowed to pressure after pensioners had to claim £1.3bn of their own cash over the last decade, including £50m in the last six months.
Former Pensions Minister Steve Webb hailed the victory, saying HMRC had “finally” listened to ordinary taxpayers and will change a system which in the past he called “an absolute disgrace”.
Since pension freedom reforms were introduced in 2015, HMRC subtracts additional tax from any initial sum taken from a fund, assuming it could be the “first month” of a series for the remainder of a tax year.
To solve this problem, pension savers have to claim their money from the treasury themselves or wait until the end of the current tax year.
Many pensions experts have condemned this as an unfair burden on savers, but HMRC has previously defended the system and insisted “no one overpays as a result”.
HMRC: From April to improve how tax code information is used for people receiving a private pension for the first time
But it adopted a new line in its latest newsletter on pension plans in an article titled “helping clients get the right pension payment faster”. Scroll down to see what it says.
This revealed that from April there will be much more rapid progress to replace “emergency” tax codes with regular tax codes, ensuring the correct amount of tax is deducted in real time.
Webb says this measure should dramatically reduce the need to fill out forms to claim overpaid taxes or for year-end tax reconciliations, particularly when people make many withdrawals during a year.
“It’s great news that HMRC have finally listened to the voices of ordinary taxpayers and changed this scandalous system,” says Webb, This is Money’s retirement columnist and partner at pensions consultancy LCP.
‘For too long, hundreds of thousands of people have had to pay excessive taxes and have had to jump through hoops to claim back their own money.
‘This new system should allow many more people to quickly move to the correct tax code and no longer end up overpaying taxes.
“The tax system is already quite complex and this change will hopefully reduce the complications pension savers face when trying to access their hard-earned money.”
In a column responding to a This is Money reader two years ago, Webb explained the current process for claiming the “emergency tax” on pension withdrawals.
He told our reader: This is all nonsense. I have repeatedly complained that HMRC routinely overtaxes people and then expects them to claim their own money.
“This system causes great disruption to people and is about the convenience of HMRC rather than the taxpayer.”
Jon Greer, head of retirement policy at Quilter, says: “HMRC’s plans to simplify tax coding from April 2025 are a welcome step towards reducing the administrative burden on savers and, firstly, to minimize overpayments.
But it adds: ‘Until systemic reforms are fully implemented, retirees will continue to face the risk of significant overpayments and the need to navigate a cumbersome claims process to recover their money.
“HMRC’s efforts to address these issues are a step in the right direction, but there is still a long way to go to build a system that works perfectly for savers.”
Helen Morrissey, head of superannuation analysis at Hargreaves Lansdown, says: ‘HMRC has announced that from April it will automatically update tax codes for those who have a temporary tax code and would benefit from having a cumulative tax code.
‘This means they will avoid overpayment or underpayment at the end of the year. This is great news for those receiving regular income from income reduction, but the problem remains for those receiving lump sums.
‘In the meantime, steps can be taken to mitigate this, for example by making your first pension withdrawal small, if possible.
‘If you receive a bill, you can fix it quickly by filling out a form and get your money back as soon as possible. Otherwise, you will receive your money at the end of the tax year.’
Tom Selby, director of public policy at AJ Bell, says: ‘HMRC has offered a ray of hope to those receiving a regular withdrawal of their income.
‘Starting in April 2025, the government is improving its tax code process to get these people from an emergency code to paying the correct amount of taxes more quickly.
‘But that doesn’t help those people who receive ad hoc lump sums from their retirement fund and it still means everyone’s first payment will be overloaded.
“It is simply unacceptable that, almost a decade after the introduction of pension freedoms, the Government has not adapted the tax system to cope with the fact that Britons can access their pensions flexibly from 55 years, and instead persist with an arcane approach that hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill out one of three forms if they want their money back within a period of 30 days.’
What does HMRC say about the emergency tax?
From April 2025, we will improve the way tax code information is used for people who are new to receiving a private pension, so that they pay the correct amount of tax from the start.
We will automatically update the tax code for customers who have a temporary tax code and would benefit from having a cumulative tax code; This means they will avoid overpayment or underpayment at the end of the year.
There is no need to contact HMRC and once a tax code has been changed we will inform customers by letter or digitally if they have registered for the e-service on the HMRC app or online.
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