A MAJOR change to pension rules has been announced after nealry half a million people were refunded £1.4billion for being overtaxed.
HMRC said that from April it will improve how tax code information is used, so that people claiming a private pension for the first time are taxed correctly.
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It signals the end of a long-running issue caused by emergency tax codes applied to pension withdrawals under the pension freedoms introduced in 2015.
For the past decade , anyone over 55 can access their pension flexibly, but HMRC often taxes large withdrawals as if they will be repeated monthly, resulting in overpayments.
You can start taking cash from a defined contribution (DC) scheme or personal pension when you reach 55.
Usually, you can take the first 25% of your pension tax-free, and then anything after that is taxed at the usual income tax rate.
But people who take large one-off lump sums on their first withdrawal from these types of pensions are taxed at an “emergency” higher rate of income tax.
This leaves retirees facing huge sums deducted from their payouts, temporarily leaving them out of pocket.
The change means HMRC will move more quickly to replace these ‘emergency’ tax codes with regular tax codes.
It means the correct amount of tax is deducted in real time and will help stop people from being overcharged.
In a statement, HMRC said customers did not need to make any changes to their tax coding process, as they would automatically change these codes.
It added: “However, as we are systematically changing the tax codes for these customers, you will receive notices for tax codes that have been automatically adjusted as they happen.””
People can be refunded for their overpayments, with 14,000 filing to get money back from October 1 to December 31 2024.
HMRC paid a total of £50million to those impacted with an average reclaim of £3,389 landing in accounts.
Almost £1.4 billion has now been reclaimed by 470,000 people, according to Steve Webb, a partner at pensions consultancy LCP.
Webb said: “It’s great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system.
“For too long, hundreds of thousands of people have been overtaxed and had to jump through hoops to claim back their own money.”
He added: “This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax. “
How to get your cash back
If you’ve withdrawn a large amount from your pension pot, you need to fill in a form to get your cash back as quickly as possible.
You can wait for HMRC to review your tax code at the end of the tax year and it will process a refund, but obviously, this means you could be waiting a while.
To get the cash back faster, you can fill in one of three forms: a P55, P53Z or a P50Z which can all be found on the Government’s website.
Which form you need to fill out will depend on how you have accessed your retirement pot:
- If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
- If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z,
- If you’ve only flexibly accessed part of your pension pot then use form P55.
To avoid having emergency tax deducted in future, try taking smaller amounts out rather than one lump sum.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
