Back in 2014, the government announced major reforms to defined contribution pensions. From 6th April 2015, people over the age of 55 have been allowed to make withdrawals from their pension pot “how they want, subject to their marginal rate of income tax in that year.” Unfortunately, nearly a decade later, thousands of people are regularly overpaying pension tax.

Why are people overpaying pension tax?

We’ve already written a helpful article on the pension tax problem. In a nutshell, you’re allowed to access 25% of your pension pot tax free. So far so good. But when you make an initial withdrawal, the taxman assumes it could be the first of several during the tax year. For this reason, HMRC applies an emergency tax code to your withdrawal. This can result in you paying higher-rate tax of 40%, even if your withdrawal shouldn’t lead to you paying any tax at all.

How big is the problem?

Since 2015, HMRC has repaid nearly £1.2 billion in overpaid pension tax. In the final quarter of 2023, the amount repaid was £38 million. During that period, over 12,000 people claimed back overpaid tax. The average reclaim was £3,216. What’s worrying is that many people won’t have realised they’ve overpaid. It’s likely that many of them don’t understand the system and are unaware they paying too much tax.

Can I avoid paying too much tax on my pension withdrawals?

In an ideal world, HMRC would apply the right tax code to each and every withdrawal. Sadly, there’s no sign of this happening any time soon. However, some people partly solve the problem by making a small, initial withdrawal. HMRC should then apply the right tax code to a second, more substantial withdrawal.

How do claim back overpaid tax?

You can claim back overpaid pension tax in a number of different ways.

Firstly, if you’re not in a rush, you can claim back the tax via your Self-assessment Tax Return. If we are your accountants, we can do this for you.

However, most people will want to get their money back rather quicker. In addition, not everyone does a Self-Assessment Tax Return. In these cases, you have to fill in one of three forms. These are:

  1. Form P55: if you haven’t withdrawn all your pension and you are not taking regular payments
  2. Form P53Z: if you’ve taken the whole pension in a lump sum and have other taxable income
  3. Form P5OZ: if you’ve withdrawn all your pension and have no other taxable income

You can complete these forms in two ways. Firstly, you can fill them in online (as long as you are logged in to your Government Gateway account). Secondly, you can download the relevant form, print it, complete it and post it back to HMRC.

Once you’ve completed a form, you should get your tax refund within 30 days. However, you’ll probably get a quicker response if you fill in an online rather than a paper form.

Not sure if you’ve overpaid tax on your pension?

If  you are currently a THP client and you’re not sure whether you’ve overpaid pension tax, talk to your account manager today. They’ll be able to examine the withdrawals you’ve made from your pension pot and let you know if you’ve overpaid tax. They can then advise you on the best way of reclaiming your money.

Please note that, unfortunately, this service is only available for existing THP clients. If you are not a client of THP but would like us to provide you with accountancy services, get in touch for a competitive quote.

Need further advice on any of the topics being discussed? Get in touch and see how we can help.

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    Avatar for Karen Jones
    About Karen Jones

    Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.

    With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.

    Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”

    Karen’s specialist skills:

    • Personal Taxation
    • Tax Efficient Planning
    • Trust Administration
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