Around 60,000 people claimed back overpaid pension tax in 2023-24, an increase of 20 per cent on the previous year, according to data from HMRC, obtained via a Freedom of Information request by Royal London.
Over half a million people have been forced to claim back overpaid tax on their pensions since 2015, with the total amount refunded approaching £1.5bn.
You can take the first 25 per cent of your DC pension tax-free, up to a maximum of £268,275, and the rest is taxed as income.
This often results in pensioners paying significantly more tax than they need to.
At the end of the tax year, HMRC will return any overpaid tax via its annual reconciliation process, but anyone wanting their money sooner must manually claim it back.
Clare Moffat, pension expert at Royal London, said tax overpayments “usually come as a massive shock” to retirees and the delay in getting the money back can “scupper people’s carefully-laid plans”.
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“HMRC recently announced an overhaul of its emergency tax codes on pensions, which it promises will deliver quicker refunds, but that doesn’t mean people won’t still be charged the higher rate in the first place.”
“The temptation is to make your first withdrawal a big one to splash out a little after years of careful saving, but unfortunately, that’s exactly how you end up paying a large chunk of your life savings in emergency tax,” she explained.
How do I know whether I can claim tax back?
If you have accessed your pension savings for the first time this year and have saved into a DC pension, you may be owed overpaid tax.
Another sign you have overpaid is if an emergency tax code was applied to your withdrawal.
You may simply notice that you have paid more tax than you were expecting. If this is the case, it is worth checking with your pension provider how you were taxed.
If you think you have been overtaxed, you need to complete one of three forms from HMRC. You can make an online claim or download a paper form to fill in here.
A spokesperson for HMRC said: “We will repay anyone who pays too much because they’re on an emergency tax code and individuals can claim a repayment much earlier if they wish.”
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