Thousands of elderly individuals in the UK are being encouraged to verify if they are entitled to refunds from HMRC, with an average sum of approximately £3,800. Those who accessed their pension for the first time and were subjected to emergency tax might be eligible for a reimbursement. Recent statistics reveal that HMRC reimbursed £48.7 million in excess pension tax between April 1 and June 30, processing a total of 12,767 claims with an average payout of £3,815.
The risk of incurring emergency tax arises when HMRC assumes that your initial pension withdrawal will occur monthly, even if no further withdrawals are made during that tax year. Since the introduction of pension freedom regulations in 2015, individuals aged 55 or above can typically withdraw up to 25% of their pension tax-free, with the remaining 75% subject to regular income tax rates.
Helen Morrissey, the head of retirement analysis at Hargreaves Lansdown, highlighted the ongoing issue of overpaid pension tax, emphasizing that individuals receiving lump sums from their pension for the first time are affected. These individuals are taxed based on a ‘month one’ basis, leading to higher tax bills that can disrupt retirement plans.
To reclaim the difference between emergency tax paid and the standard tax rate, individuals can complete an online form or await reimbursement from HMRC at the tax year’s end. Specific forms need to be filled out based on how retirement funds were accessed. Planning ahead by making initial pension withdrawals smaller or considering the tax implications for lump-sum withdrawals for activities like travel or home renovations can help mitigate tax burdens.
In the event of a substantial tax bill, individuals must complete one of three forms for HMRC to process refunds promptly, or they can opt to wait until the conclusion of the tax year for reimbursement.