The UK’s Office of Tax Simplification has today published a review entitled ‘Savings Income: Routes to Simplification’, designed to help people understand taxation surrounding pension freedoms.
One of the points that the review covers is the over taxation of pension freedom payments. It states that more could be done to help people understand the tax implications of withdrawals from pension funds and points that the OTS would like to work with HMRC to identify options other than the use of emergency tax codes on pension withdrawals.
Gareth James, head of technical resources at AJ Bell has welcomed the move, calling it “long overdue”, as hundreds of thousands of people will have received a lower amount after tax than they were expecting because of the extra tax deducted from their payments.
“Whilst this can be reclaimed, the fact is lots of people will not be aware that they need to do this,” he said. “The approach to taxation of pension freedom withdrawals is loaded in favour of HMRC.”
AJ Bell recently surveyed 370 people who have used the pension freedoms and 63% of them assumed they had been taxed correctly on their first withdrawal and a further 24% said they didn’t know, with only 12% being sure that they had been over taxed.
“The reality is that the vast majority of these people will have been overtaxed on their first withdrawal so lots of them will be unaware that they have been over taxed and will not have put in a reclaim,” said James.
“The recommendation from the OTS for HMRC to review this process is very welcome. A change is long overdue given that pension freedoms have now been in existence for over three years and HMRC have been going digital for a similar length of time.
“Given the investment in making PAYE reporting real time and the introduction of dynamic coding, a solution that suits all parties could be achievable.”