How to claw back tax overpaid when opting for pension drawdown

Many retirees opting for drawdown schemes – taking money out of their pension savings – have overpaid tax. Here’s what to do to get it back.

Savers received record average tax refunds of £3,560 each in the second quarter of 2020 after being overtaxed on withdrawals from their pensions. Total refunds since the pension freedom reforms of 2015 have now reached £627m.

The issue affects many savers opting to use drawdown schemes to access their pension funds on reaching retirement, rather than converting savings to income by buying an annuity. While savers may take the first 25% of their money tax-free, withdrawals above this amount are taxable at their marginal rate of income tax. 

Drawdown plan providers often do not have an up-to-date tax code for savers taking money out of their funds in this way for the first time and are therefore forced to apply an emergency tax code. This often results in savers paying too much tax on their withdrawals, particularly on larger sums. The money then has to be reclaimed.

The government has been urged to address this problem since the pension freedom reforms encouraged many more savers to consider drawdown plans. But while hundreds of thousands of savers have been caught out in this way over the past five years, HMRC has yet to find a solution to the problem. In the meantime, savers entering drawdown for the first time must check their tax position carefully. 

Start slowly

It may be possible to avoid the problem. One workaround suggested by some pension providers is to treat your first withdrawal as a means to establish your tax position: where you’re intending to make a withdrawal above the 25% tax threshold, keep the additional sum to a minimum so you pay only a small amount of tax at the emergency rate. 

Your pension provider should then be able to liaise with HMRC to ensure you pay the right amount of tax on subsequent withdrawals, though it may take a few weeks for the correct tax code to come through. Alternatively, those who do pay too much tax do not have to wait until the end of the tax year to reclaim what they are owed. While one option is to claim the excess back on your self-assessment tax return, you can secure a more speedy refund by making an immediate application to HMRC.

However, you will need to complete the right form. Savers who haven’t withdrawn their entire pension should use the P55 form to reclaim their excess tax; those who have withdrawn all their savings and have taxable income will need form P53Z. If you have no other taxable income, complete P50Z. The forms are at www.gov.uk/claim-tax-refund – you will need a Government Gateway account – and HMRC says refunds are paid within 30 days.

Recommended

Does part of the £50bn lying forgotten in dormant accounts belong to you?
Personal finance

Does part of the £50bn lying forgotten in dormant accounts belong to you?

Around £50bn of our money is just sitting in dormant bank, savings and pension accounts. Make sure none of it's yours, says Ruth Jackson Kiry=by.
20 Apr 2021
What’s in Biden’s global corporation tax proposals?
Global Economy

What’s in Biden’s global corporation tax proposals?

US president Joe Biden’s administration recently proposed a universal model for taxing global companies. Saloni Sardana looks at what's involved.
13 Apr 2021
The minimum pension withdrawal age is set to rise – don’t get caught short
Pensions

The minimum pension withdrawal age is set to rise – don’t get caught short

From April 2028, the earliest age at which you can take money from your pension savings will rise to 57. It's vital that you understand the detail of …
13 Apr 2021
International tax competition is under threat – which stocks are most vulnerable?
Global Economy

International tax competition is under threat – which stocks are most vulnerable?

The idea of a global corporate tax regime is taking off, with the US proposing a sales tax on multinationals. John Stepek looks at which companies cou…
8 Apr 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021