If you have used pension freedom legislation to access your pension you could have paid too much tax and be entitled to claim back thousands of pounds.
That is because when you take lump sums from your pension, an option available to those aged over 55 since 6 April 2015 - your pension provider applies an emergency tax code to the withdrawal. HM Revenue & Customs (HMRC) rules mean your provider assumes that you will make the same withdrawal on a monthly basis, rather than treating it as a one-off payment. So your provider might apply tax as though you have taken a far greater income from your pension than you actually have, and the excess bill could amount to thousands of pounds, according to broker AJ Bell.
For example, a basic-rate taxpayer who takes just £10,000 from a pension pot owes no tax as this falls within the personal allowance. But if their provider assumes they are taking £120,000 in pension income over a year - eg, £10,000 a month - it would apply tax accordingly, which would be £3,099 for that withdrawal. On a month one basis it would be treated as the first of 12 £10,000 withdrawals, explains AJ Bell.
The Financial Conduct Authority (FCA) reports that between April and September 2016 alone, 302,107 pension pots were accessed flexibly for the first time and thousands of those who have accessed pots since April 2015 could be entitled to reclaim tax. The FCA says that an average 139,000 pension pots per quarter were accessed for the first time using flexi-access drawdown or lump sum payments between the introduction of freedoms and today. But only an average10,998 reclaims for overpaid tax were made in each quarter of the 2016 year, implying that many of those who have taken lump sums and been overcharged have not reclaimed tax.
You can claim back overpaid tax by contacting HMRC. The way you reclaim will depend on your personal circumstances and any other income you have drawn in the tax year.
• If the payment used up your pension pot and you have no other income in the tax year, fill in form P50Z.
• If you have other taxable income and the payment used up your pot, fill in form P53Z
• If you are not taking regular payments and the payment did not use up all your pension, fill in form P55. Only use this form if your pension provider cannot refund you, however.
Have you been overcharged?
| Withdrawal amount | Tax due for a basic rate taxpayer if a single withdrawal | Tax taken under month 1 basis |
| £2,000 | £0 | £216.40 |
| £5,000 | £0 | £1,099.46 |
| £10,000 | £0 | £3,099.46 |
| £15,000 | £798 | £5,178.56 |
| £40,000 | £5,798 | £16,428.56 |
Source: AJ Bell
How much tax should you be paying on your pension?
Pension income today is treated as earned income for tax purposes so the amount you pay will depend on your annual income. Everyone can earn up to £11,500 in the 2017-18 tax year before paying any tax. After that, you pay basic-rate tax of 20 per cent on the next £33,500 of income, higher-rate tax of 45 per cent on taxable income between £33,500 and £150,000 and additional rate tax of 45 per cent on taxable income over £150,000. That means that any other earnings you have should be taken into account when working out how much tax you should pay on your pension.
Those aged 55 have, since April 2015, been able to access their entire pension pot at once if they wish, but doing this would push many people into a higher income bracket.
