How to Reclaim Money if You Overpaid Taxes Utilising Pension Freedoms

There is a tax oddity in the pension system allowing tens of thousands of individuals who went into their pension accumulations by utilizing a drawdown known as flexi-access.  This came on the heels of pension freedoms of about two years ago, and many may have overpaid taxes on their income.  This information was uncovered following research by broker AJ Bell.

However, a lot of pensioners do not retrieve tax monies they may have overpaid when removing monies out of their pension(s).

Her Majesty’s Revenue & Customs (HMRC), is from where reclamations need to be processed, but the Financial Conduct Authority FCA data indicates that 139,000 pension accounts per quarter which have been entered using flexi-access for the first time, and statistics show that just 11,000 claims have been filed to get their money back, very short of its potential.

At the point of a first drawdown withdrawal, the pension purveyor will probably not provide a tax code to the pension holder.

HMRC rules indicate that the provider of the pension must assess tax based on that only piece of the entire tax year’s allowances are given.  This is called a “month one” basis.  This then means that the drawdown counts as if it is being made each month for the whole year when it should really be a one-off withdrawal which is typically the situation.

Let’s take an instance of a pensioner taking £10,000 intending to stay under the £11,500 allowance.  This person would have planned no tax liability, but they could find an assessed tax to the tune of £3,099. As talked about above, this is because, on a one-month basis, it would be as if the first 12 withdrawals would be calculated as 12 x £10,000 thereby coming across as if £120,000 was being taken out over the course of a year.

Perhaps not all those who drawdown will have a refund coming, but most should as long as the “month 1” basis was intended but in reality, they were figured in as if they were taking a much bigger annual withdrawal than what actually happened.

Tom Selby, an AJ Bell senior analyst, stated that ‘HMRC’s insistence that an emergency tax code must be applied to pension freedom withdrawals means tens of thousands of people will have paid too much tax on their withdrawals, yet very few of them have reclaimed this tax.  This might be because they don’t know they have paid too much tax or because the process to reclaim it just seemed too complicated.

‘Whatever the reason, there is likely to be millions of pounds sitting with HMRC that could be legitimately reclaimed. It is up to individuals to check whether they have paid too much tax and to make a claim, they are unlikely to get any help from the Government.”

The type of withdrawals made from their pensions directly affects how they apply to reclaim their tax monies.  How people make a claim for any overpaid tax depends both on the nature of the drawdown they have made from their pension as well as their personal circumstances.

With regard to reclaiming, the UK Government website states that if all of your pension monies were used up by the tax payment and you have no other income, the P50Z form must be filled out.

But if you do have other income subject to taxation, and still the tax payment used up your pension pot and you have other taxable income, fill in form P53Z.

Finally, if the payment didn’t take up your entire pension monies and you are not taking regular draws, fill in form P55.  Having said that, this form can only be used if your pension seller cannot refund you.