Thousands of Brits are having to pay an extra £3,252 in income tax to HMRC when they don't need to.
The extra tax charge is impacting those who are accessing their pensions. Since 2015, people who access one-off lump sums from their pension are taxed by HMRC.
However, instead of the normal income tax rate, HMRC issues an emergency tax rate as if this person will pull out this amount from their pot every month - meaning they often pay far too much. This means they pay thousands of pounds more in tax than they actually owe, which they then need to claim back.
According to the latest official figures from July to September this year, HMRC processed 18,851 tax refund claims. The total amount repaid during this three-month period was £61.3million - making the average overpayment worth £3,252. The amount repaid by HMRC is actually £5million higher than in the three months before this period and a whopping ££33.1million more than in the same period last year.
To get the overpaid tax back, you would either need to make a claim yourself to HMRC or wait for the tax department to review the self-assessment payments and then issue a refund. The exact amount you can get back if you overpay obviously depends on how much money you took from your pension, what other income you have, and your tax rate.
Although people are not permanently out of pocket, it can often be several months before the emergency tax has been corrected and paid back. Pension Experts have called for the system to be reformed over the last few years with chartered financial planner at Quilter Ian Cook noting that the data continued to show an "upward trajectory".
He said: "HMRC has seen a significant 89% increase in the number of claim forms processed compared to last year, illustrating how many more people are turning to their pension pots to help them get by compared to last year. Unfortunately, those people are still stuck with an archaic system that over-taxes them and leaves them waiting for a long period before they can access the full amount owed.
Mr Cook noted that the tax overpayment was likely particularly frustrating for those trying to access their funds quickly. On top of this, people often do not understand why this has happened due to the complexity of the PAYE system.
He added: "The figures starkly illustrate the pressure the cost-of-living crisis is placing on everyday finances, with more people choosing to access their pension funds flexibly as a result. To avoid this emergency tax, it is best to speak to a professional financial planner who can reduce the risk of paying excessive tax upfront that needs to be reclaimed. You can achieve this through several smaller withdrawals, as opposed to an initial lump sum. This ensures that most of the withdrawal utilises an updated tax code, preventing emergency taxation on the full amount.
“This has been an issue for years and the system needs an overhaul. The current process is leaving an increasing number of people facing emergency tax at a time they need their money most.”
On the topic of overtaxed pensions, an HMRC spokesperson previously told the Mirror: "Nobody overpays tax as a result of taking advantage of pension flexibility. We will automatically repay anyone who pays too much because they’re on an emergency tax code. Individuals can claim back any overpayment earlier if they wish."