HMRC faces pension tax headache
The latest pension flexibility statistics reveal that HMRC is still fighting the scourge of pension tax overpayment despite streamlining the process of providing updated tax codes for people who are new to receiving a private pension, from the current tax year.
A total of 12,767 repayment claims were processed in the second quarter of the year, totalling £48,701,927, and around £92m for the year to date.
For the second quarter, this equates to just under £4,000 per refund, so HMRC’s changes might have resulted in marginally fewer claims but with a higher value compared to the previous quarter, although this was also slightly down on the same period the year before.
“The idea behind HMRC’s new tax coding process is that it should reduce the administrative burden on savers, while also minimising the number of overpayments being made in the first place,” said Jon Greer, Head of Retirement Policy at Quilter.
“But the changes they made do not impact the taxation of the first pension payment, and although it is early days, and the stats may include payments from the previous tax year, the change appears to be having minimal impact.”
A problem with the system
Greer noted that pension withdrawals are always going to be a challenge for a PAYE system that is designed for regular income.
He added that many people now access their pension for a variety of reasons, be that regular income, gifting, emergencies or one-off payments and each of these could result in emergency tax codes being issued.
“This is a headache for people, as the burden is on them to apply for a tax refund. If you are considering accessing your pension, seeking guidance or, where appropriate, professional financial advice will be key as this will ensure you make any withdrawals from a pension in the most tax-efficient way, while also helping to calculate your exact liabilities.
“This new system will need some time to bed in, and hopefully we will start to see the number of claims drop more significantly.”
