At the end of 2021, HMRC refunded over £42m in tax overpayments to those drawing down from their pensions. So if you have recently taken money out, it’s worth checking whether you have paid too much tax on your pension. We look at how withdrawals are taxed, what you need to do, and which forms to complete if you have overpaid.
The problem with pension tax
The 2015 pension freedoms gave people greater flexibility in how they can access and use their pensions when they reach the age of 55. However, the tax system has not been upgraded to match this level of flexibility and is still operating quite rigidly.
The main problem is the emergency tax on pension income. There is an income tax charge if you withdraw cash from your pension pot above the 25% tax-free amount. However, a higher rate emergency tax code is applied if the pension provider does not have your correct tax code. Unfortunately, this is what’s happening in most instances. As a result, people are being taxed excessively and then have to reclaim this money.
As we approach the 7th anniversary of pension freedoms, many financial experts are calling for an overhaul of how pensions are taxed. But until this happens, the onus is on savers to ensure they are checking and paying the correct amount of tax.
How can you reclaim overpaid tax on a pension?
If you have paid too much tax on a pension withdrawal, there are three forms available to help you claim your money back halfway through the tax year:
- P55 – the form to reclaim overpaid tax if you have flexibly accessed money from your pension pot.
- P53Z – the form to use if you need to reclaim overpaid tax relating to serious ill-health lump sums.
- P50Z – the form is used for an income tax refund if you have flexibly accessed your pension but have stopped working.
HMRC provides more details on their website, which includes an online service where you can claim your pension tax refund. If you need further advice on reclaiming pension tax, speak to our financial planners, who will be happy to help.
HMRC states that you can apply for a tax refund immediately after-tax is overpaid on a pension withdrawal and is processed within 30 days. They also confirm that “Anyone who does not claim will automatically be repaid at the end of the year.”
Don’t leave your tax refunds to HMRC; this is your money, which could be used or saved according to your needs.
Pension reviews and planning
Regular pension checks will ensure you can monitor the tax on your withdrawals. Helping you to keep an eye on your spending, so you can plan how to use your pension income. Instead of waiting for your annual pension statement, get a review sooner with a professional financial planner. We can provide you with an accurate pension and financial forecast, which takes into account potential scenarios that may occur in the future.
It’s also worth checking your government state pension forecast to see whether you have made enough NI contributions. For more information, read our previous blog Winning the state pension lottery.
Do you need advice on your pension scheme? Please get in touch with our independent financial planning team.