26 April 2023 , 14:36
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Brits have paid £1.01billion more in tax on their pension than they should have, according to latest figures.
Since new reforms were introduced in 2015, retirement savers who make an initial withdrawal from a "defined contribution" pension pot are taxed by HMRC.
However, instead of the normal income tax rate, HMRC issues an emergency tax rate as if this person will pull out this amount from their pot every month.
This means they pay thousands of pounds more in tax than they actually owe, which they then need to claim back.
For example, if someone pulls out £10,000 from their pension pot one month, HMRC taxes them as if they will be taking out £120,000 that year.
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The latest official figures show that between January and March this year, HMRC processed 15,800 tax refund claims to people who accessed their pensions early.
The amount refunded back by HMRC totalled £48.5million over the same three month period.
To get the overpaid tax back, people either have to make a claim themselves or wait for HMRC to review the self-assessment payments and then issue a refund.
The exact amount you can get back if you overpay obviously depends on how much money you took from your pension, what other income you have, and your tax rate.
HMRC does not publish the number of those who have received a refund after an internal review - this means the £1billion figure could be even higher.
Although people are not permanently out of pocket, it can often be several months before the emergency tax has been corrected.
After the latest data release, pensions experts have called for the system to be reformed.
Steve Webb, a former pensions minister and now partner at LCP described the system "as a disgrace" and that reform was "long overdue".
He said: "A system based on systematic over-taxing of pension savers cannot be right.
"There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place.
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"We are not talking about small sums, with over £1billion being paid back by HMRC so far.
"Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury.”
An HMRC spokesperson says: "Nobody overpays tax as a result of taking advantage of pension flexibility.
"We will automatically repay anyone who pays too much because they’re on an emergency tax code. Individuals can claim back any overpayment earlier if they wish."