HMRC’s tax attack on pension withdrawals

This reader – wrongly overtaxed by £15,000 – is one among many to be hit by a new wave of errors, says Sam Brodbeck

Aquirk in the income tax system means HMRC is wrongly overcharging people who make use of new rules to draw cash from pensions. Under the rules introduced in April 2015, over-55s can take regular or ad hoc sums from their pension pots.

But if someone one makes a large withdrawal wal in a single month, the tax x man assumes this will be their eir income each month and taxes xes you on an “emergency rate”. ate”.

The flaw means eans many are hugely ely over-taxed. The overpayments can be reclaimed, but you need to fill out a onerous “mini tax return”, and there are concerns people cashing in small amounts may not even be aware they’ve lost out. Recent figures show the Treasury banked £1.6bn in tax from the first year of the pension freedoms (April 2015 2015-16), 16), nearly double i its initial estimate of £910m. The discrepancy c could be explained by a low ra ratio of people reclaiming ov overpaid tax, compared to those w who have made withdrawals, expert experts suggest. In one case se seen by Telegraph Money,Mo Robert Mohamed, left – a former investmen investment banker – was shockedshoc to be told he w would be taxed £4 £43,385 on a £100,000 withdrawal he planned to make from his pension pot.

This was around £15,000 more than he should have paid.

The overpayment was caused by the “emergency tax” provision that treats a single withdrawal as the first of equal, monthly payments over the year. On the basis of his withdrawal HMRC assumed Mr Mohamed’s annual income would be £1.2m and taxed him accordingly.

In most cases pension companies do not have the saver’s correct tax code and simply follow HMRC guidelines. This means you only benefit from one twelfth of your £11,500 “personal allowance” – the income you can earn tax-free each year.

Mr Mohamed said: “I realised there was a discrepancy and that HMRC was taxing me too much.

“The vast majority of people, especially where smaller withdrawals are involved, are likely to just accept it. I think HMRC is just scooping up the extra cash and, in many cases, hanging on to it.”

After turning 55 last year – the age at which pension cash can be accessed under the new liberalised rules – Mr Mohamed began drawing on his pension, which has a total value of around £1.5m and is held in a selfinvested personal pension (Sipp).

He planned to draw down around £100,000 annually but wishes to do this in a single transaction each year rather than in monthly withdrawals.

Pensioners who have overpaid must either wait for HMRC to put them on the correct tax code (a spokesman could not say how long this would take) or fill out one of three repayment claim forms.

In Mr Mohamed’s case this is the “P55 form” because he is only taking a partial cash withdrawal. If taking an entire pension as cash, you must either fill in “P50Z” (if you’ve stopped working) or “P53Z” (if you’re still receiving earned or other income).

You can fill out the relevant form online so long as you have a “Government Gateway” account, or by post. If your pension provider has an up-to-date tax code from HMRC,

Whatever the financial detail outlined in forthcoming party manifestos, the pound has rallied following Tuesday’s announcement of the June 8 election. That in itself has implications for savings, investments, pensions and more.

Robert Mohamed paid £ 15,000 too much in tax