Alongside the latest HMRC update on record pension withdrawals, HMRC has also published just the latest data on the value of emergency tax which it applied to pension withdrawals.
Read the HMRC latest data here
It shows 2019/20 tax year was a record year for the amount of emergency tax applied to pension withdrawals, with HMRC repaying £166,619,969 to people as it had initially deducted too much tax.
This follows a record year for overall pension withdrawals.
Andrew Tully, technical director at Canada Life, commented:
“Beware of the sting in the tail if you are considering using your pension as a cash machine. Any withdrawals over your 25% tax-free allowance are taxed as income. However, HMRC often require the first withdrawal to be taxed at the emergency rate, which normally means too much tax is deducted. This can catch people out, for example those who are planning to use the withdrawal for a specific purpose and haven’t factored in the tax that is due.
“The whole system is complex and there is a clear need to review how it works in practice given we are now five years into the freedoms.”
If you make a withdrawal, your pension provider is likely to apply an emergency tax code, which may well mean you pay more tax on the withdrawal than you expect. You can reclaim the tax directly from HMRC using one of three forms, P55, P53Z or P50Z. There is no need to wait until the end of a tax year to do so.
- If you make a withdrawal, your pension provider is likely to apply an emergency tax code, which may well mean you pay more tax on the withdrawal than you expect. You can reclaim the tax directly from HMRC using one of three forms, P55, P53Z or P50Z. There is no need to wait until the end of a tax year to do so
- It helps if you know the level of tax you are likely to pay, free calculators are available including here
- One option to ensure more accurate tax is levied is to withdraw a small payment initially. For example, if someone withdraws £100, that will be taxed on the emergency basis. This provokes HMRC to send the provider the appropriate tax code for the client, which should happen within a few weeks. The full withdrawal can then be made, and the tax levied will be more accurate as the provider has the client’s tax code (although a small reclaim may still be necessary). This requires a little advance planning but gives a better client outcome.