HM Revenue & Customs (HMRC) has repaid £36.8 million in overpaid tax on pensions in the three months to September 2017, figures reveal.
In the third quarter, 16,168 forms were processed and the average tax reclaim was just under £2,300.
Under new pension freedoms laws, anyone over the age of 55 is able to drawdown from their pension pot, of which the first 25 per cent is tax-free. However, tax is automatically applied when someone takes their first flexible withdrawal from their pension, as HMRC assumes that the same amount will be taken on a monthly basis.
That means a much higher rate of tax is calculated than may actually be needed.
A spokesperson for HMRC said: “Claimants presenting their 2017-18 P45 to their pension provider always pay the correct tax. In the event they don’t, any discrepancy will be settled within 30 days of us being notified.”
Sir Steve Webb, the former pensions minister, is campaigning for a change in tax policy. He believes that HMRC should only take the standard rate tax throughout the year and if tax is due at the end of the year, it should be collected then.
“The way in which pension withdrawals are taxed is little short of a scandal. It cannot be right that HMRC knowingly overtaxes people to the tune of £100 million per year and then expects thousands of individuals know which form to fill get their money back,” he said.
Alongside publishing tax data, HMRC has published data about pension scheme registrations and has reported that there has been a 17 per cent drop in new pension scheme registrations compare with the same period last year, with only 1,169 applications submitted this quarter.