Every year, around 10,000 pension savers are forced to pay on average £3,000 each to HMRC tax unnecessarily. Incredibly, some have had to hand over as much as £55,000.
They then have to go through the bother of either claiming it back from HMRC or waiting for a refund, that will arrive long after the tax year is over.
Incredibly, the scandal has been going on since 2015, with pensioners paying a staggering £1.2billion in tax since then, completely unnecessarily.
That money belongs to them but due to a “quirk” in HMRC systems, they have to pay it anyway.
The system has triggered fury among pension savers, many of whom didn’t realise what was going to happen and had earmarked the money for their own personal use.
And why shouldn’t they? It’s their money.
The Tories failed to fix it, now experts are calling on PM Keir Starmer and Chancellor Rachel Reeves to clear up the mess.
Tom Selby, director of public policy at AJ Bell, said savers had to claim back almost £200million in overpaid tax in the last tax year alone, after being “clobbered” with a needless tax bill.
“Depressingly, the true over-taxation number will likely be substantially higher.”
In many cases the tax bill wasn’t just unfair, but completely unexpected, Selby added.
Starmer and Reeves must act to stop more getting caught by HMRC’s “faulty systems”, Selby said. “The new government needs to urgently review this approach and deliver a solution that taxes withdrawals correctly.”
The problem was originally caused by former Tory chancellor George Osborne’s pension freedom reforms, launched in April 2015.
These allow the over-55s to take one-off lump sums from their workplace or personal pension defined contribution plans.
Withdrawals are taxed if total earnings for the year exceed the £12,570 personal allowance. But HMRC applies an emergency tax code on the money, and that’s where the trouble starts.
When someone takes a lump sum, HMRC assumes they will continue taking the same amount every month for the entire financial year.
It will do this even if they have no intention of making any further withdrawals that year.
Selby said HMRC has had more than nine years to put it right, but failed to act.
“It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact Brits can access their pensions flexibly from 55.
“Instead, it is persisting with an arcane approach that hits people with an unfair tax bill, often running into thousands of pounds.”
Selby said people have to fill in one of three forms if they want to get their money back within 30 days.
Otherwise they have to rely on HMRC spotting the issue and sorting it out by the end of the tax year.
Selby said those on low incomes are least likely to reclaim the money, as they often have limited experience dealing with the self-assessment tax system.
Yet they’re the ones who need the cash most.
HMRC insists that nobody overpays tax in the end, as they ultimately get their money back.
Yet it would be a lot simpler if they didn’t get their pockets picked in the first place.
If Reeves wants to clear up the mess left behind by the Tories, she can’t let this injustice simply roll on.
It’s now Labour’s responsibility to sort out HMRC. That’s what’s being in government is all about.
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