Pension withdrawals incurred a record £167m of emergency tax payments to HMRC in 2019/20, up from just over £90m in 2015/16, according to figures released today.
HMRC data published today shows £166,619,969 was repaid by HMRC to people it had initially deducted too much tax from.
Canada Life says one option individuals can take to ensure more accurate tax is levied is to withdraw a small payment initially. If someone withdraws £100, that will be taxed on the emergency basis. This provokes HMRC to send the provider the appropriate tax code for the client, which should happen within a few weeks. The full withdrawal can then be made, and the tax levied will be more accurate as the provider has the client’s tax code, although a small reclaim may still be necessary. Canada Life technical director Andrew Tully says this requires a little advance planning but gives a better client outcome.
Tully says: “Beware of the sting in the tail if you are considering using your pension as a cash machine. Any withdrawals over your 25 per cent tax-free allowance are taxed as income. However, HMRC often require the first withdrawal to be taxed at the emergency rate, which normally means too much tax is deducted. This can catch people out, for example those who are planning to use the withdrawal for a specific purpose and haven’t factored in the tax that is due.
“The whole system is complex and there is a clear need to review how it works in practice given we are now five years into the freedoms.”