HMRC has refunded £1.4 billion to pension savers since 2015 due to emergency tax charges on initial withdrawals, with the top 25 refunds averaging £106,900. The figures highlight a persistent issue for those accessing their pensions for the first time, and experts warn the problem may worsen.
The emergency tax charges occur because pension withdrawals are often treated as if they are earned income in the month they are taken, possibly pushing individuals into higher tax brackets. HMRC has recently updated its processes, aiming for quicker refunds, but acknowledges that many will still initially be overcharged.
Clare Moffat, pension expert at Royal London, stated: “It’s incredible to think that some people withdrawing from their pension for the first time were entitled to emergency tax refunds in excess of £100,000.” She added that these unexpected tax bills “usually come as a massive shock” and can disrupt financial plans.
From April, HMRC implemented changes to automatically update tax codes for individuals beginning to recieve private pensions. However, Moffat anticipates an increase in large withdrawals, driven by upcoming inheritance tax changes.
Currently, pensions are exempt from inheritance tax, making them a tax-efficient way to pass on wealth. However, from 2027, unused pension funds will become subject to inheritance tax, prompting more individuals to consider making lifetime gifts from their pension pots while still alive.
“A rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals,” Moffat explained.”So, the problem of emergency taxes isn’t going away, and there’s a chance it could get worse.”
HMRC has been contacted for comment.
by Anna Wise, PA Business Reporter
