How to reclaim emergency tax on pension drawdowns

HMRC has issued guidance on how to claim back a refund in the current tax year on an overpayment of tax when a pension has been flexibly accessed

Sara White, Editor, Accountancy Daily

At the moment withdrawals through pension drawdown are taxed at an emergency rate, resulting in millions of pounds in overpaid tax.

In the first six months 2023, £104m was refunded in overpaid tax affecting over 30,000 people who had drawn down funds from pension pots, HMRC figures showed. The average refund was £3,551.

It is important to take action if you have paid too much income tax on a flexibly accessed pension payment by claiming a refund if either the pension pot has been flexibly accessed but not emptied; you will not be taking regular or flexible payments before the end of the tax year; and the pension provider is unable to make a tax refund.

Tom Selby, head of retirement policy at AJ Bell, said: ‘It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.

‘One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big over-taxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.’

Automatic refunds are made at the end of the tax year if the taxpayer does not make a claim.

An HMRC spokesperson said: ‘We will automatically repay anyone who pays too much because they are on an emergency tax code. Individuals can claim back any overpayment earlier if they wish.’

Pension savers can withdraw money from their pension pots from the age of 55 but these withdrawals are taxed at emergency rates and do not take into account individuals’ earnings and tax thresholds. Under pension drawdown rules, the first 25% of the withdrawal is tax free, the balance is taxed at the individual’s normal tax rate of either 20% or 40%.

Anyone who have flexibly accessed all of their pension should notify HMRC using form P53Z.

For those who have drawn down all of their pension and stopped working, use form P50Z.

Before you apply for a tax refund, you will need to inform HMRC about the income you expect to receive in the tax year the pension drawdown took place. Estimated figures can be used if final figures are not available.

If you fill in a self assessment tax return, do not include any estimated self assessment income in this claim, unless you want HMRC to include this in calculating the repayment.

HMRC recommends that claims are made online but it is also possible to make a claim using form P55.