HMRC has paid back more than £900m in overpaid tax to savers who have made ‘flexible’ withdrawals from their pensions under Pension Freedom rules.
Figures published today help show the total amount paid back since these rules were introduced in 2015, and have been described by LCP partner, and former pensions minister Steve Webb as “a quiet scandal”.
Under current HMRC practice, when an individual first takes a lump sum from a DC pension tax is deducted at source. But instead of being deducted at the individual’s normal income tax rate, an ‘emergency’ tax rate is applied , which assumes the individual will make this withdrawal multiple times in the year, potentially pushing them into a higher tax band. Individuals then have to fill in one of three different forms to claim back this money.
The figures show that in the last three months, almost 10,000 people filled in such forms and were refunded £33m. LCP says that by totalling these figures published ever quarter, it is clear that HMRC has now refunded £925m in overpaid tax on these DC pots.
This is in respect of 270,000 forms, although LCP points out it is possible that some individuals may have filled in more than one form.
However the pension consultants add that this figure is likely to be an understatement of the full scale of the problem – as some people will not realise they have overpaid tax, or do not know they have to complete a claims form to get it back.
Those that do not do this should get the money back if they complete a tax return the following year, but no figures are available for the amounts refunded through this route, or whether some outside the self-assessment system have failed to get a refund.
LCP says it is likely that total overpayments may exceed £1 billion since the system began.
Webb says: “It remains a quiet scandal that tens of thousands of people every year have to fill in forms to get back tax from HMRC which they should never have had to pay in the first place.
“It may be convenient for HMRC to overtax people and then force them to fill in forms to get their money back, but it is hardly putting the customer first. A much simpler system would be for tax to be deducted at the basic rate with adjustments for those who may pay tax at a different rate, including through the annual tax return process. It is time for this scandal to end”.
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