Pension customers ‘overpaying’ thousands in temporary tax


You may have to wait months to get back the thousands paid in 'temporary' tax to HMRC

Those who have made flexible withdrawals from their pension pot could have paid thousands more in tax than they should have done – if only temporarily.

New figures show the ‘temporary overpayment’ is more than £1billion since 2015 and £48million in the first three months of this year alone.

HM Revenue and Customs (HMRC) will repay the money, so it is not permanent and may not be a disaster for some people – however your money is always better off earning interest or working for you than sitting in the Treasury.

There have been calls for the system to be reformed as it could particularly hit people on lower incomes.

The state of affairs came about due to changes to the pension system in 2015, which allowed people to withdraw some of their defined contribution pension savings as an income from the age of 55, while leaving the remainder invested.

When they do so, some are charged at an emergency tax rate, which means they could temporarily pay thousands of pound more in tax than they actually owe.

To reclaim the overpaid tax, it is necessary to complete one of three HMRC forms, which should mean the money is returned within 30 days.

If they don’t, then they rely on HMRC reviewing the payments, possible after receiving a self-assessment tax return and making a refund. The tax authority will work out their annual tax bill at the end of the tax year as part of the usual reconciliation exercise.

What that means is it could be many months before the money is ‘returned’.

The form you need to fill out will depend on how you have accessed your retirement pot:

If you have emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z.

When you have emptied a pot by flexibly accessing your pension and are not working or receiving benefits, fill out form P50Z.

If you have only flexibly accessed part of your pension pot, then use form P55.

One suggestion to combat this is for customers making a pension withdrawal for the first time to just make a small withdrawal such as £100. That will generate a tax code from HMRC which the pension provider will apply to any future withdrawals.

Then tax will be taken at source and is generally a more accurate method.

If you are uncertain, seek advice from a professional financial adviser or pensions expert.

The forms needed are available on the gov.uk website.

More information and guidance about pensions is available from Pension Wise, an impartial service backed by the Government. Go to www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise.