Warning to pensioners as hundreds of thousands are overtaxed by £3,000

Pensions experts urge government for reform after pensioners collectively overpaid more than £1bn since 2015

Some £160m was repaid in overpaid pension tax last year, bringing the total since 2015 to more than £1bn (PA Archive)

Hundreds of thousands of pensioners have been overtaxed by £3,000, new data show, prompting leading experts to brand the government’s system a “disgrace”.

People who have flexibly withdrawn pension savings have collectively overpaid more than £1bn in tax since 2015, the latest HM Revenue and Customs (HMRC) figures show

This is because pensioners are initially charged an emergency tax code when they withdraw money from their pension, before HMRC pays it back via a refund at the end of the year.

Some £160m was repaid last year, bringing the total since 2015 to more than £1bn.

Pensions experts called the system a “disgrace” as they urged the government for reform.

“This is an absolute disgrace. A system based on systematic over-taxing of pension savers cannot be right,” said Sir Steve Webb, a former pensions minister and now a partner at consultants LCP.

“There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place.”

An overhaul of the pension system in 2015 meant people were able to take out some of their defined contribution pension savings as an income from age 55, while leaving the remainder invested.

This means, however, that some people are charged at an emergency tax rate, and might, therefore, end up temporarily paying thousands of pounds more in tax than they owe.

To reclaim the overpaid tax, they must complete one of three HMRC forms, and the money should be returned within 30 days. For more information on which of the three you should fill out, click here.

Should they fail to do so, they rely on HMRC to review the payments, possibly after receiving a self-assessment tax return, and make a refund.

The tax authority will work out a person’s annual tax bill at the end of the tax year as part of its standard reconciliation exercise.

Mr Webb said that, although people would not be permanently out of pocket, it could be many months before someone’s financial situation was corrected.

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