Many Local Pension advisors have expressed concern amount recovered from HMRC for overtaxed pension withdrawals since 2015 has now hit £1 billion.
In the first three months to the end of March 23, over 15,000 people received a refund of overpaid tax totalling almost £50 million. With an average value of £3,000 per claim.
But Local Pension Advisors are concerned about how many people have not reclaimed over paid tax because they are unare they’ve been over charged? HMRC have no answer to that. Many will not know about their entitlement until they complete their self-assessment returns. Many lower income earners may never know if they don’t complete a tax return. Although HMRC claims that everyone eventually receives a refund as they reconcile their overpayments over time.
This has been going on now for eight years.
HMRC’s position is that there is no other way for them to ensure that they collect tax on withdrawals, when they come to take their pensions, other than by applying emergency tax codes.
AJ Bell suggested to some of their Local Pension Advisors that it might be a good idea for people to withdraw a small amount first, say £100. That would let HMRC set an initial tax code and then bigger withdrawals would be taxed at that rate. That might well create the alternative problem of not paying enough tax and getting a demand from HMRC down the land. Better to be in credit with the first, some might argue.
The fact is that a better more efficient and fair system is required.
The situation may get worse. With the recent announcement of the scrapping of the Lifetime Allowance (LTA) came news that the amount of tax-free cash would be capped at £268,275. However, individuals who had protected a higher amount of tax-free cash under previous rules, would be allowed to keep that higher allowance. This complicates matters for some people and chances are it is likely to lead to further miscalculation in tax.
We will see.
Whilst HMRC seems to have no problem in over taxing individuals drawing down their pensions, they seem to be having more trouble deciding how to tax cryptocurrencies. Initially they proposed that cryptocurrencies would be subject to capital gains tax. Now however, they are consulting on whether to narrow those parameters to only apply when they are either sold or exchanged. Not when they are used to buy goods.
Again, we will see.