PENSION tax repayments to overtaxed British savers have fallen during lockdown, according to new research.
Pension tax repayments have been a side effect of pension freedoms introduced in 2015, providing savers with the ability to manage their money as they see fit. While withdrawals are available, these are only possible up to the 25 percent tax free limit. Anything above this will be taxed at the individual’s rate of income tax.
Taxation involves having the correct tax code for an individual, but when the provider does not have the right code, it often taxes using an emergency code.
This emergency code often leads to higher tax which has to be reclaimed later down the line.
But research has shown lockdown has had a palpable impact on pension tax repayments.
Between April and July, £27 million was repaid to savers who had been overtaxed.
However, this was down from approximately £47 million between April and June – otherwise known as Quarter 2 – in 2019.
The total amount reclaimed by people overtaxed on pension freedoms withdrawals has now climbed to £627million.
Tom Selby, senior analyst at AJ Bell commented on the findings.
He said: “Hard-working savers continue to be unfairly overtaxed for flexibly accessing their retirement pot.
“The overtaxation figures for April to July were always likely to be affected by COVID-19, with far fewer claims processed than usual.
“This may be because HMRC was stretched to breaking point as it responded to the challenge posed by the pandemic.
“However, it is clearly not ideal that thousands fewer people made a reclaim for the tax they were owed at a time when families were already facing huge financial pressures during lockdown.”
Mr Selby also highlighted that despite the UK being five years into pension freedoms, HMRC’s approach to taxing withdrawals has not been reviewed.
He added: “This affects hundreds of thousands of people, with the obvious risk that those who fail to make a reclaim are left short of cash when they need it most.”
He urged HMRC to review their approach to taxation sooner rather than later.
Savers can claim a tax refund when they have taken a small pension lump sum from their savings.
This can be achieved through accessing the government’s website.
There, savers will find the P53 or P53Z forms which will allow them to claim in various ways.
The government website explains savers can use the online Government Gateway service, fill in a form on-screen then printing and posting, or filling in a form by hand.
Savers should fill in the form with details of any other income they expect to receive during this tax year.
This will allow HMRC to repay the saver correctly, to avoid hassle for those involved.