Thousands of individuals saving for retirement have successfully reclaimed over £10,000 in emergency tax on their pension funds in the past tax year, with some even receiving over £100,000 back.
If the HM Revenue & Customs (HMRC) mistakenly assumes that your initial pension withdrawal will be a regular monthly payment, you may face emergency tax charges, even if you do not make any further withdrawals that year. Typically, you can withdraw up to 25% of your pension tax-free starting at age 55, with the remaining 75% subject to your standard income tax rate.
According to data obtained from HMRC through a Freedom of Information request by Royal London, 11,700 pension savers reclaimed £5,000 or more in emergency tax in the 2023/24 tax year. This marks an increase of 2,000 individuals (21%) compared to the previous year, with 2,400 savers receiving refunds exceeding £10,000, showing a year-on-year rise of 100 people (4%).
On average, each saver received a refund of £3,342, up by £280 (9%) from the prior year. However, many pension savers often experience delays in receiving their refunds. The top 25 refunds averaged an impressive £106,897. In total, approximately 60,000 investors reclaimed refunds in 2023/24, showing a 20% increase from the previous year’s 50,000 claims.
Pension expert Clare Moffat from Royal London expressed astonishment at the substantial emergency tax refunds some first-time pension withdrawers were entitled to, emphasizing the potential disruption these unexpected tax bills can cause to individuals’ financial plans. Moffat highlighted how these unplanned tax amounts could significantly impact intended purposes for the withdrawn funds, such as home purchases or other major expenses.
To claim back overpaid emergency tax, individuals can either fill out an online form to calculate the difference between the emergency tax paid and the correct tax amount based on their standard rate. Alternatively, HMRC will refund any excess tax at the end of the tax year. Depending on how individuals accessed their retirement funds, they will need to complete one of three specific forms for the refund process.
