Pensioners hit by ‘emergency’ £55K tax

PENSIONERS have been charged up to £55,000 each in “emergency” income tax after making withdrawals from their pension pots, figures have revealed.

Thousands of pensioners have been overcharged to the tune of more than £1billion since 2015, when the “pension freedom” rules were introduced. These allowed savers to take ad hoc amounts from their pensions – but meant they were charged an emergency rate with HM Revenue & Customs’ systems assuming a one-off withdrawal would be repeated each month. As a result, savers are dramatically overtaxed and must either apply for a refund or wait until the tax system corrects the error.

The 100 biggest refunds that HMRC paid worked out at an average of £54,185, according to a Freedom of Information request from insurer Royal

London. The average refund for the 2022-2023 tax year was £3,062. About 2,300 pensioners claimed more than £10,000 back in overpaid tax, while 300 received more than £15,000, and nearly 9,700 claimed more than £5,000 each. Retirees are entitled to take a taxfree lump sum from defined contribution pots from the age of 55. But the taxman assumes that a one-off withdrawal will be replicated every month, so someone taking £10,000 will be taxed on it as if they will be taking £120,000 over a year.

The way the tax system works means that someone taking £30,000 from their pension will receive £7,500 tax free but will then be taxed as if their monthly income was £22,500 and they would pay emergency income tax of £8,503, Royal London said. Only £1,984 would be due if the 20 per cent basic rate was applied, meaning an additional £6,519 would need to be claimed back.

But unless a refund is requested by the taxpayer, the repayment of the overpaid money can take months, as the taxman does not begin reviewing income tax codes until the end of the tax year.

Clare Moffat, of Royal London, said: “The pension savers charged over £50,000 in emergency tax will of course be extreme cases. To trigger a tax bill of this size, they will have taken out a lump sum in excess of £200,000. There aren’t too many scenarios in which someone will need this amount, except maybe to help their children or grandchildren [on] the housing ladder.”

A spokesman for HMRC said: “Nobody overpays tax as a result of taking advantage of pension flexibility. We will repay anyone who pays too much because they’re on an emergency tax code. Individuals can claim back any overpayment earlier if they wish.”