Tax on Pension Withdrawals
A quirk in the income tax system means HMRC is wrongly overcharging people who make use of new rules to draw cash from pensions. Under the rules introduced in April 2015, over 55’s can take regular or ad hoc sums from their pension pots. If someone makes a large withdrawal in a single month, however, the tax man assumes this will be their income each month and taxes them on an “emergency rate”. The flaw means many are over-taxed.
The overpayments can be reclaimed, but there is a need to fill out a “mini tax return” and there are concerns people cashing in small amounts may not even be aware they have lost out. In most cases pension companies do not have the saver’s correct tax code and simply follow HMRC guidelines.
How do I get my money back?
Pensioners who have over-paid must either wait for HMRC to put them on the correct tax-code or fill out one of three re-payment claims forms. The “P55 form” is used when only taking a partial cash withdrawal. If taking an entire pension as cash, the form to use is “P53Z” (if the person has stopped working) or “P50Z” (if the person is still receiving earned or other income).