Jackie Hall

Written by: Jackie Hall

Jackie Hall


Reclaiming overpaid tax on pension withdrawals needs skill and determination

Emergency tax rates applied to pension lump sums can lead to individuals suffering substantial overpayments of tax and it seems many of those affected may be failing to make repayment claims.

When a lump sum is taken from a pension fund, the pension company will need to deduct tax through the PAYE system. 

If this is the first payment from the fund the pension company will not already have a tax code for the pensioner and this leads to the lump sum being taxed as if it is a sum which will be received each month on an ongoing basis. This is because of the way in which an emergency tax code operates. It looks at each month separately and does not take into account an individual’s cumulative position. 

So when the lump sum is received an emergency tax code is very likely to push the payment into higher rates of tax. In the majority of cases this treatment results in an overpayment of tax.

The overpaid tax can be reclaimed during the tax year using one of three forms specifically provided for this purpose in cases where the fund has been encashed in full, or where there has been a partial encashment but no further payments are expected from the fund in that tax year. 

However, where further payments are expected HMRC will need to confirm a PAYE code to be used for future payments.

At best this means that an individual may receive a repayment of the tax with the next pension instalment; a delay of perhaps a minimum of 30 days, but possibly longer. 

On the other hand an individual may be left out of pocket for several months whilst the repayment makes its way either through the PAYE system or when HMRC review the tax account after the end of the tax year. 

This is simply not acceptable. Actively reclaiming the refund can speed things up but this presupposes that an individual understands the tax system and doesn’t assume HMRC have got things right.

Individuals can request a new tax code from HMRC through their online tax account. However, speaking from personal experience, requesting an amended code is not as simple as it ought to be and requires both an in-depth knowledge of the tax system and a degree of determination akin to a mountaineer’s desire to conquer Everest. One might also be led to believe that a quick call to HMRC might do the trick but again this often ends in frustration and a large telephone bill (and the 'on hold' music isn’t easy listening).

There must be a better way of dealing with this. But despite calls from various bodies, including the Office of Tax Simplification, HMRC are refusing to accept that the rules need to be changed. Is this also all part of the big plan to ensure all tax flows into the government’s hand a little earlier?

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