Thousands of individuals who have been saving for their retirement through pension schemes have successfully reclaimed over £10,000 in emergency tax on their pension withdrawals in the past tax year. Some claimants have even received refunds exceeding £100,000.
The risk of facing emergency tax arises when HM Revenue & Customs (HMRC) assumes that your initial pension withdrawal will be a recurring monthly payment, regardless of whether you make additional withdrawals within the same tax year.
Typically, individuals aged 55 and above can withdraw up to 25% of their pension fund tax-free, while the remaining 75% is subject to regular income tax rates.
Royal London, through a Freedom of Information request, obtained data from HMRC, indicating that 11,700 pension savers reclaimed £5,000 or more in emergency tax during the 2023/24 tax year. This figure represents a 21% increase compared to the previous year, with 2,400 savers receiving refunds exceeding £10,000, marking a 4% rise.
On average, each claimant received a refund of £3,342, showing a 9% increase from the previous year. The top 25 refunds averaged an impressive £106,897.
In total, approximately 60,000 investors claimed refunds in the 2023/24 tax year, a 20% increase from around 50,000 claimants in the previous year.
Clare Moffat, a pension expert at Royal London, highlighted the impact of unexpected tax refunds on individuals’ financial plans, potentially leading to delays or cancellations of anticipated expenses such as home purchases or life experiences. Claimants can recover excess emergency tax paid by submitting an online form or waiting for HMRC to reimburse them at the tax year’s end.
Depending on how individuals accessed their pension pot, they will need to complete one of three specified forms to claim back the difference between the emergency tax paid and the amount owed based on their regular tax rate.