TAX RAID ON YOUR PENSION
Shock as savers are overcharged £26m in 3 months
WORKERS cashing in their hardearned pension pots early are being overtaxed to the tune of millions of pounds, it emerged yesterday.
In an “outrageous” blunder, tax inspectors admitted having to repay more than £26million in the past three months.
The excess income tax was wrongly taken from savers who had withdrawn cash from the retirement funds using new pension freedoms.
More than 200,000 people are already thought to have been overtaxed on one-off withdrawals using new rules launched in 2015.
But it is understood the problem is still going on and many thousands more will be affected.
Industry experts warned that the issue highlighted the need for an overhaul of the system.
Under the new rules, over-55s can take a oneoff lump sum of up to 25 per cent out of their pension pots without paying any tax.
The costly errors have arisen because the
one-off withdrawals are being treated as if they were the first of regular, monthly pension payments which would leave them paying income tax at standard rates.
HMRC’s systems generate a “Month 1” tax code and then apply deductions.
But according to data, 242,000 people took just one payment from their pension during the 2016-17 tax year.
It is these one-off withdrawals that may have been hit with hefty income tax bills that should not have applied.
The repayments have only been given to those who have spotted the mistake and claimed the cash back. It is thought many more will not know they are due a rebate.
Former pensions minister Sir Steve Webb, who is now Royal London’s director of policy, said: “It is outrageous that in just three months HMRC has over-taxed people by more than £26million.
“It cannot be acceptable to take thousands of pounds per person in excess taxes and then expect people to have to claim that money back. The rules need to be changed so only basic rate tax is deducted and any extra tax due is collected through the normal tax return process. This would be a far fairer system.”
Pension firm AJ Bell calculates that a single £10,000 pension withdrawal, which should be tax-free, would be taxed by £3,099.46 if the “Month 1” code were wrongly applied. If savers realise they have been overtaxed, they must fill out one of three P55 forms to reclaim the money. Britain’s largest pension firms suggest at least 200,000 may have overpaid.
Draconian
Tom Selby, of AJ Bell, said: “Thousands of people who think they are using the new regime sensibly will have been hit with shock bills and this will continue unless HMRC rethinks its draconian application of ‘Month 1’ tax.”
Former pensions minister Baroness Ros Altmann said: “I would like the Inland Revenue to find a better way to tax pension withdrawals. The whole point about pensions freedoms was meant to be about choice but the tax element is undermining this flexibility.”
An HMRC spokesman said errors were being put right.
He added: “Claimants presenting their P45 to their pension provider will pay the correct tax. In the event that they don’t, any discrepancy will be settled within 30 days of HMRC being notified.”
MOST people older than 55 welcomed the pension freedoms introduced in 2015, even if they were not sure about the complex fine details. They trusted the taxman to work things out fairly for them.
Now it is revealed that as many as 200,000 people have been overtaxed because the taxman got it wrong. In the past three months alone, HMRC has been forced to repay a staggering £26million it charged in error on what should have been tax free.
The lame excuse being rolled out is that much of the tax work is now being done by computers (ie there is no one to blame) and it is up to people to check how much they have been charged and to claim it back if they have been made to pay too much.
Tax is too complicated to be left to chance in this way. Many honest people who pay what the taxman asks won’t be able to make head nor tail of this scandalous situation.
How can it be that someone receiving less than the £11,500 tax-free allowance has had to pay up to £225, for example? This lunacy is daylight robbery.
The tax authorities have got to find a more equitable way of working so people pay what they owe and not one penny more.