When pension freedoms were introduced in 2015, giving people more flexibility over their savings, people with defined contribution (DC) pensions were allowed to take their cash out in chunks rather than being forced to buy an income for life.
However, HMRC chose to apply emergency tax codes to such withdrawals meaning that people often ended up paying far more tax than needed and then had to claim it back.
This should drastically reduce the need either for end-year reconciliations or form-filling to claim back over-paid tax, particularly where people make multiple withdrawals in a single year.
He said: “It is great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system.
“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.”
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Read MoreIt read: “From April 2025, we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset.
“There is no need to contact HMRC and once a tax code has been changed, we’ll inform customers by letter or digitally if they’ve signed up for paperless in the HMRC app or online.”
Over 14,000 reclaim forms were processed during the quarter, with an average reclaim of £3,389.
Tom Selby, director of public policy at AJ Bell, said these figures are likely only “the tip of the iceberg” because it only captures those who fill in the relevant HMRC reclaim form.
“HMRC has offered a glimmer of hope to those who take a regular drawdown income [with the news it is improving its tax code process].
Mr Selby said it is “simply unacceptable” that the Government has failed to adapt the tax system to cope with the fact Britons are able to access their pensions flexibly from age 55.
This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.
“If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”
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