HM Revenue & Customs (HMRC) has said there will be no rethink of controversial emergency taxes on the pension freedom withdrawals made by millions of savers, despite pressure from the industry to change its approach.
The current rules require providers to charge emergency tax the first time someone uses the pension freedoms to access their pension savings. As a result, members who make a single flexible withdrawal from their fund are charged as if will be made on an annual basis.
The system regularly results in overpayments. The Office for Tax Simplification (OTS) found £37 million of tax has been repaid to date as a result of overpayments of tax pension lump sum withdrawals since April 2015.
The OTS, along with others in the pensions industry have been urging HMRC to review the tax rules. Earlier this year the OTS said: ‘More could be done to help people understand tax implication of withdrawals from pension funds.’
However, after reviewing the current system regarding flexible pension drawdown access, HMRC has concluded ‘any changes at the current time would not significantly improve the tax position for the majority of recipients’.
HMRC decided ‘the existing PAYE treatment of flexible pension drawdowns remains the most effective method of deducting tax in these cases and it reduces the risk of underpayments of tax arising.’
In May this year, HMRC revealed over 10,000 people submitted tax reclaim forms for these single withdrawals, with 6,218 filling in P55, 3,448 filling in P53Z, while 988 filled in P50Z forms.
AJ Bell senior analyst Tom Selby said: ‘This is a disappointing stance from HMRC when you consider that people withdrawing their pension have been overtaxed by hundreds of millions of pounds over the past few years.
‘While almost £300 million has been repaid to savers since the pension freedoms were introduced, many more who didn’t fill out the required forms will have been left short-changed for up to a year.’
Continued overtaxation of those using the pension freedoms, however, could risk pushing people into financial difficulties whereby they are forced to access more than they need to, Selby added. This could potentially create an extra tax liability as a result, he said.
‘HMRC’s belligerent refusal to countenance any public debate on this issue is deeply frustrating. The current system was introduced without consultation and leaves millions of savers at risk of being hit with a shock tax bill.
‘At the very least we need a public consultation on HMRC’s approach to determine whether the current approach can be improved for the benefit of savers.’
HMRC confirmed it will continue to keep the current taxation process under review and monitor drawdowns and related claims.
By Talya Misiri (NMA)