Taxman to overcharge pension takers by £100m
PENSION takers are likely to be overcharged by £100million this year under a “tax first, question later” approach by the Treasury.
Although the first quarter of any withdrawal from a pension pot is tax-free, the rest of the money is subject to taxation.
Those people who cash in their policy are to be put on an “emergency tax code”, which results in a substantial overpayment, according to analysis.
The Treasury admits that, in the first three months of this financial year, they had to pay out more than 10,000 refunds worth more than £26million.
New quarterly figures are expected shortly and if refunds continue at this rate, they are likely to imply a total over-taxation of more than £100million a year.
Now former pensions minister Sir Steve Webb is calling on HM Revenue & Customs to end the “tax first” policy.
In a written submission to the Work and Pensions Committee inquiry on Pension Freedoms, Sir Steve says any tax should be taken at the standard rate.
Sir Steve – now director of policy at mutual Royal London – said: “The way in which pension withdrawals are taxed is little short of a scandal. It cannot be right that HMRC can knowingly overtax people to the tune of £100million a year and expect thousands of individuals to know which form to fill in to get their money back.
“Too often, HMRC’s approach is to tax first and ask questions later – and this must stop.”
He suggests any extra tax due on withdrawals over the first 25 per cent could be collected through the endof-year tax return.
This would largely eliminate over-payments and avoid the need to process tens of thousands of refund claims, he said.
In its submission to the MPs Select Committee, Royal London argues that the Pension Freedoms policy as a whole has been “vindicated” by its first two years of operation.
The company highlights pension freedoms giving choices to ordinary savers which were previously the preserve of those on higher incomes. But it recognises reforms are a work in progress and identifies several areas where more could be done.