The UX tax office HMRC has announced that it has repaid just shy of £37m in incorrectly charged emergency tax on pension freedoms withdrawals transacted between 1 July and 30 September, bringing to a total repaid tax incorrectly applied so far of £262m.
This figure of more than a quarter of a billion pounds sterling relates to emergency tax applied on those withdrawals since pension freedoms were introduced in April 2015.
In fact, commenters have noted that, since it only covers those who have filled out the complex official forms P55, P53Z and P50Z, the true figure of the unjustified tax grab will be substantially higher.
Tom Selby, senior analyst at UK online investment platform AJ Bell, pictured left, said that, although hundreds of millions of pounds has been successfully reclaimed by individuals overtaxed on pension freedoms withdrawals, the total amount repaid so far could be just “the tip of the iceberg”.
Many of those affected, said Selby, “particularly basic rate taxpayers and people who don’t take advice”, are at risk of not seeing their unfairly applied tax being returned, or not returned for a long period of time, as they will have little or no experience dealing with tax matters and might not even know the reclaim forms exist.
“As a result they could end up getting thousands of pounds less than they thought they would when they made the withdrawals. While HMRC says eventually people’s tax position will be rectified even if they don’t fill out the relevant form, this will be no use to someone who needs the money today to pay social care costs or help fund their kids’ tuition fees.
Selby called upon the government to urgently review the policy, saying that it is “manifestly unfair to lumber savers who are using the freedoms in the way the government intended with whopping great tax bills”.
Head of policy at UK financial advisory firm Hargreaves Lansdown Tom McPhail, pictured left, pointed out the average tax reclaim in the past quarter had been just under £2,300, with around 8% of those who took a flexible payment from their pension making a reclaim.
“In theory,” said McPhail, “HMRC processes mean even if you don’t fill in the form and immediately reclaim overpaid tax, you should eventually get the money back. The problem is HMRC isn’t infallible: if you don’t take the initiative and ask for the money back, you risk missing out; at best you’ll miss out on the use of the money for up to a year.”
Echoing Selby’s points, McPhail described this as “a clumsy system” that has not been designed with the best interests of the investor at its heart.
He concludes by saying “HMRC and pension providers should be able to request the appropriate tax code in advance of making any payment — the technology is there to do this kind of thing.”