Pension savers overcharged £26million in three months in over-taxation | Personal Finance | Finance

In an “outrageous” blunder, tax inspectors admitted having to repay more than £26million in the past three months. 

The excess income tax was wrongly taken from savers who had withdrawn cash from the retirement funds using new pension freedoms.

More than 200,000 people are already thought to have been overtaxed on one-off withdrawals using new rules launched in 2015. 

THIS is how much savers are taking from pensions: How do YOU compare?


Pensions raid: HMRC overcharge innocent savers £26m in three months

The whole point about pensions freedoms was meant to be about choice

Baroness Ros Altmann

But it is understood the problem is still going on and many thousands more will be affected. 

Industry experts warned that the issue highlighted the need for an overhaul of the system. 

Under the new rules, over-55s can take a one-off lump sum of up to 25 per cent out of their pension pots without paying any tax. 

The costly errors have arisen because the one-off withdrawals are being treated as if they were the first of regular, monthly pension payments which would leave them paying income tax at standard rates. 


More than 200,000 people are already thought to have been overtaxed

HMRC’s systems generate a “Month 1” tax code and then apply deductions. 

But according to data 242,000 people took just one payment from their pension during the 2016-17 tax year.

It is these one-off withdrawals that may have been hit with hefty income tax bills that should not have applied. 

The repayments have only been given to those who have spotted the mistake and claimed the cash back. 


It is thought many more will not know they are due a rebate

It is thought many more will not know they are due a rebate. 

Former pensions minister Sir Steve Webb, who is now Royal London’s director of policy, said: “It is outrageous that in just three months HMRC has over-taxed people by more than £26million. 

“It cannot be acceptable to take thousands of pounds per person in excess taxes and then expect people to have to claim that money back. The rules need to be changed so that only basic rate tax is deducted and any extra tax due is collected through the normal tax return process. This would be a far fairer system.” 

Pension firm AJ Bell calculated that a single £10,000 pension withdrawal, which should be tax-free, would be taxed by £3,099.46 if the “Month 1” code…

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