The tax authority is to refund £49.5m in overpaid tax to people who withdrew cash from their pension pots in the last three months of 2024 – but has proposed a fix to reduce future overpayments.
Data shows more than 470,000 claims have been filed with HMRC since pension freedoms were introduced a decade ago, with an aggregate value of almost £1.4bn.
Now, however, HMRC is set to address the issue by introducing permanent tax codes more quickly to avoid delays and reduce the risk of overcharging tax on pension withdrawals.
Steve Webb, partner at LCP, has been campaigning for HMRC to fix this issue for several years.
“It is great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system,” he said. “For too long, hundreds of thousands of people have been overtaxed and had to jump through hoops to claim back their own money.
“This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax.
“The tax system is complex enough as it is, and this change should hopefully reduce the complications which pension savers face when they try to access their hard-earned cash.”
HMRC said pension schemes should not have to make changes to their tax coding processes, but administrators should expect to receive notices of new tax codes for some members. The change will take effect from April this year.
Quarterly data from HMRC shows that the average claim is for a refund of between £3,000 and £4,000.
Jon Greer, head of retirement policy at Quilter, said the development was “a welcome step towards reducing the administrative burden on savers and minimising overpayments in the first place”.
However, Greer said there were still issues with the tax system emanating from the 2015 changes. HMRC’s pay as you earn system struggles to tax one-off withdrawals correctly, meaning individuals could be faced with unintended tax consequences.
“Until systemic reforms are fully implemented, retirees will continue to face the risk of significant overpayments and the need to navigate a cumbersome claims process to reclaim their money,” he said.
“HMRC’s efforts to address these issues are a step in the right direction, but there is still a long way to go to build a system that works seamlessly for savers.”
