HMRC repaid a total of £48.5m to people who overpaid tax when they flexibly accessed their pensions in Q1 2023, pushing the total repayments since the introduction of pension freedoms in 2015 past £1bn.

The latest government Pension Schemes Newsletter confirmed that, from 1 January to 31 March 2023, HMRC repaid a total of £48,550,827, more than double the £22,317,529 repaid in the same period in 2022.

The tax repayments on flexible withdrawals are necessary as HMRC applies an emergency 'month 1' tax code on the first withdrawal, which can lead to an initial over-taxation.

People reclaiming overpaid tax must fill in one of three forms, with the latest government Pension Schemes Newsletter revealing that HMRC processed a total of 15,856 during the period, including 9,654 P55 forms, 4,361 P53Z forms, and 1,841 P50Z forms.

Analysis from LCP showed that adding up all the quarterly figures since 2015 gives a total amount paid back to £1.018 billion.

However, the firm warned that the total amount of over taxation is likely to be “significantly” above the reported figure of £1 billion, as HMRC does not publish figures for those savers who didn’t fill in a form and instead get a tax refund when they fill in their tax return.

Commenting on the update, LCP partner, Steve Webb, stated: “This is an absolute disgrace. A system based on systematic over-taxing of pension savers cannot be right.

"There is no good reason why citizens who access their pension should have to go through the hassle of claiming back excess taxation which they should never have had to pay in the first place.

“And we are not talking about small sums, with over £1bn being paid back by HMRC so far. Reform of the system is long overdue so that it works to the benefit of pension savers and not the Treasury”.

Quilter head of retirement policy, Jon Greer, also argued that the system needs a “rethink”, highlighting the “huge” year-on-year increase as demonstration of the continued necessity for people to access their pension funds amidst the intensifying cost-of-living crisis impacting day-to-day financial situation.

He continued: “The ongoing cost-of-living crisis is exerting significant pressure on personal finances, and it is likely that more people will need to access their pension savings in the coming months to make ends meet.

“For Q1, the average tax refund per saver was £3,062. This problem stems from a peculiarity in the PAYE system when individuals begin withdrawing money from their pension as they are not taxed using the correct tax code.

"This system clearly needs a rethink as these ever-increasing figures do not point to a process that is working well.”

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