HMRC had to fork out the amount to repay those who were put on an emergency tax rate after making a lump sum withdrawal from their funds.
This occurs because HMRC assumes the amount taken out from the retirement pot is being earned every month.
The first flexible withdrawal made on a pension fund is treated as a ‘month 1’ tax basis, as has been the case since 2015.
HMRC splits the tax allowances for every month and takes it away from the withdrawal. The hardest hit will be people who have no extra income stream, as HMRC will amend your tax amount accordingly if you are in employment.
To claim any overpayment in tax, you need to fill out a reclaim form, which 12,331 people did in the last quarter. If the form is completed correctly, you ought to receive a refund within 30 days.
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But if you have regular income, you can also wait for HMRC to put you in the right position at the end of the tax year.
The total amount paid back in the three-month period continued to rise from the £42m in overpayments to HMRC recorded between January and March this year.
It follows speculation ahead of the Autumn Statement on 30 October that Chancellor Rachel Reeves is “ready to raid” the tax-free limit over-55s can withdraw.
Reports suggested the tax-free limit could be cut by two-thirds of its current £268,275 level to £100,000.
However, the Government has insisted it does not comment on speculation around tax changes “outside of fiscal events”.
‘Pension saga drags into the ninth year’
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown – which won Best Lifetime Investment ISA at the YourMoney.com Awards 2024 – said: “The pension tax saga drags on well into its ninth year, with HMRC repaying almost £44.3m to people who were overtaxed on pension withdrawals over the quarter. It’s a situation that beggars belief, with around £1.3bn in total being refunded so far.
“You can get the extra money refunded, but this is not the point. Many of these people will not have been expecting this and the extra tax bill will have come as a nasty shock.
“It may even have undermined plans that people had for the money in the short term, and it takes time to sort out. It’s an extra complexity that no one needs and should have been resolved many years ago.”
Morrissey added: “The reason this happens is that you can be put on an emergency rate of tax whereby HMRC treats it as though that first payment will be repeated every month. You can try to mitigate this by making your first pension withdrawal a small one if possible.
“If you do get landed with a bill, then you can get it rectified quickly by filling out a form and getting your money back as soon as possible.”
