Some pension savers have been forced to pay “emergency” income tax of more than £50,000 after withdrawing cash from their pensions, new findings have revealed.
Since the dawn of pension freedoms in 2015, if someone makes an initial withdrawal from a defined contribution pension fund, HM Revenue & Customs assumes it will be the first of many for the rest of that tax year, which could push the individual to greater retirement. tax band than normal.
Therefore, it applies an emergency tax rate on the basis that this could be just the first in a series of withdrawals. Since 2015, more than £1 billion has been overcharged.
Anyone who believes they may be affected by the emergency tax saga can wait until HMRC automatically reviews their tax codes and issues a refund, or request a refund by filling out a formwhether in paper or online.
A tax nightmare: Some pensioners have been forced to pay ’emergency’ income tax of more than £50,000
An HMRC spokesperson said: ‘Nobody pays extra taxes to take advantage of the flexibility of pensions.
‘We will automatically pay anyone who pays too much because it is in an emergency tax code. Individuals can claim any overpayment back sooner if they wish.’
After submitting a Freedom of Information Request, Royal London discovered that approximately 2,300 pensioners claimed more than £10,000 in emergency tax on their pension income.
In the 2022-23 tax year, 9,700 pensioners claimed £5,000 or more. Of this number, 300 received a check for more than £15,000.
According to Royal London, the average refund per saver was £3,062, but the top 100 claimed average sums of £54,185.
Sweeping changes to pension rules in 2015 mean people can withdraw some or all of their defined contribution pension savings as lump sums from age 55.
But HMRC taxes the initial withdrawn sum as if it were the pension saver’s monthly income every month during the tax year.
For example, according to Royal London, someone withdrawing £30,000 would normally receive £7,500, or 25 per cent, tax-free and the remaining amount is taxed as if their monthly income were £22,500, even if the holder The pensioner has no intention of receiving any further pension income that year.
In other words, they would pay £8,503 in emergency taxes. However, if the basic rate of tax were applied, the sum would be £1,984. He The difference, or an additional £6,519, would have to be claimed from HMRC.
Clare Moffat, pensions expert at Royal London, said: “Naturally this could come as a big shock to some people, especially if they had set aside the money for something specific like a holiday or home improvements.”
“Suddenly, a big chunk of the money they thought they were going to get has actually gone to paying emergency taxes, which they probably hadn’t anticipated.”
He added: ‘Pension savers who were charged more than £50,000 in emergency tax will, of course, be extreme cases. To generate a tax bill of this size, they will have withdrawn a lump sum in excess of £200,000.
“There aren’t many scenarios where someone would need this amount, except perhaps to help their children or grandchildren get their foot on the housing ladder.”
One way to ensure you don’t have to pay a large emergency tax charge is to make a smaller initial withdrawal from the defined contribution pension in question.
Moffat said: ‘A much better approach is to make your initial withdrawal modest and this will determine how much tax you will pay on future withdrawals.
“If you need to make a large withdrawal, remember that you will pay more taxes, especially if you have a large purchase in mind or something you need the money for.”
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