HM Revenue & Customs (HMRC) has repaid some £26 million in tax on cash accessed through pension freedoms over the last three months, a report has revealed.
Anyone over the age of 55 is able to access their pension pot with the first 25 per cent 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 actually needed.
HMRC said it repaid £26,835,357 in overcharged tax between 1 April to 30 June 2017, after processing more than 10,000 tax repayment claim forms.
Some experts recommend taking a “nominal” amount in their first withdrawal, which would avoid triggering the higher rate of tax.
Former pensions minister, Steve Webb, said: “It cannot be acceptable to take thousands of pounds per person in excess taxes and then expect people to have to claim that money back.
“The rules need to be changed so that only basic rate tax is deducted and any extra tax due is collected through the normal tax return process. This would be a far fairer system.”