Thousands of individuals saving for retirement have successfully reclaimed over £10,000 in emergency taxes on their pension funds during the previous tax year, with some even receiving upwards of £100,000. One may incur emergency tax charges if HMRC assumes that the initial pension withdrawal will be recurring monthly, regardless of further withdrawals within the same tax year.
Typically, individuals can withdraw up to 25% of their pension tax-free once they reach 55 years of age, while the remaining 75% is subject to regular income tax rates. Data obtained by Royal London through an FOI request to HMRC indicates that in the 2023/24 tax year, 11,700 pension savers reclaimed £5,000 or more in emergency tax.
This marked a 21% increase, totaling 2,000 more individuals compared to the previous year. Among these claimants, 2,400 received refunds exceeding £10,000, reflecting a 4% rise from the prior year. On average, each saver received a refund of £3,342, showing a 9% increase from the previous year. Notably, the top 25 refunds averaged an impressive £106,897.
In total, approximately 60,000 investors reclaimed taxes in 2023/24, a 20% increase from the previous year’s 50,000 claimants. Clare Moffat, a pension expert at Royal London, expressed astonishment at the significant refunds some individuals received, emphasizing how unexpected tax bills could disrupt financial plans.
Claiming back overpaid emergency taxes can be done by submitting a form online to reconcile the difference between the emergency tax paid and the actual tax owed based on regular rates. Alternatively, HMRC may refund the excess tax at the end of the tax year. Depending on how one accessed their pension funds, specific forms need to be completed for the refund process.