HMRC repaid pension savers a total of £48,560,205 between July and September this year, with the average person getting back £3,539 in emergency tax
Thousands of people have successfully reclaimed an average of around £3,500 each from HMRC after being stung by emergency tax on their first pension withdrawals.
Between July and September this year, HMRC handed back a staggering £48,560,205 to pension holders, with the typical individual recovering £3,539.
Emergency tax often kicks in on your first pension withdrawal when HMRC incorrectly assumes you’ll continue receiving this lump sum monthly – even when you make no further pension withdrawals during that tax year.
You can spot if you’re being hit with emergency tax by checking whether your tax code ends with M1, which signifies “Month 1”.
Typically, you’re entitled to withdraw up to 25% of your pension pot tax-free from age 55, with your standard income tax rate applying to the remaining 75%, reports the Mirror.
Royal London pension specialist Clare Moffat warned: “The temptation is to make your first withdrawal a big one to splash out a little after years of careful saving. Unfortunately, that’s exactly how you end up paying a large chunk of your life savings in emergency tax.”
The silver lining is that HMRC will reimburse the excess tax at the tax year’s end – though you needn’t wait that long, as there’s a form available to expedite your refund.
You can reclaim the gap between what you’ve forked out in emergency tax and what you should rightfully have paid under your standard tax rate by completing an online form. Alternatively, you can sit tight and let HMRC reimburse you when the tax year wraps up.
You’ll need to complete one of three specific forms, depending on how you’ve tapped into your retirement savings. If you have completely drained your pot through flexible pension access while still in employment or claiming benefits, form P53Z is your go-to option.
If you’ve fully accessed your pot flexibly but aren’t currently working or receiving benefits, form P50Z is what you’ll require. For those who’ve only partially accessed their pension pot flexibly, form P55 is the appropriate choice.
Ms Moffat highlighted that you can reduce emergency tax charges when withdrawing pension funds by initially taking out a modest amount. Though this approach may prove impractical when substantial sums are urgently required.
An HMRC representative stated: “Ultimately, nobody overpays tax as a result of taking advantage of pension flexibility. We will repay anyone who pays too much because they’re on an emergency tax code and individuals can claim a repayment much earlier if they wish.”
