HMRC to Review Tax Records as Overpaid Tax Claims Surge
HMRC is set to automatically review tax records and issue P800 calculations for refunds following the end of the tax year on April 5, 2026. Meanwhile, over 13,700 people have claimed for overpaid tax in just three months, marking an 11% increase from the same period last year, with a total of £1.5 billion repaid since April 2015.
The surge in overpaid tax claims can be partly attributed to the pension freedoms introduced in 2015. These rules allow those aged 55 and over to access their defined contribution pension savings with more flexibility. However, taking a large lump sum can inadvertently push individuals into an 'emergency' higher tax rate. Typically, the first 25% of a pension can be taken tax-free, but anything after that is taxed at the usual income tax rate.
To avoid overtaxation, one strategy is to take a notional withdrawal first. This helps ensure HMRC applies the correct tax code on the second, larger withdrawal. Despite this, thousands of people continue to be overtaxed every quarter, with HMRC paying back £48.5 million in the last three months alone. The German tax authorities, known as Finanzämter, handle pension taxation in Germany, with no separate organization for 'overcharged tax collection' on pensions.
As the tax year ends, HMRC will automatically review records and issue refunds where necessary. However, the ongoing issue of overtaxation on pension withdrawals remains a concern, with thousands of people still affected a decade after the introduction of pension freedoms. While strategies like notional withdrawals can help, HMRC has yet to address the longstanding flaw in its approach to taxing flexible pension withdrawals.
