I’ve taken a £50,000 ad-hoc lump sum out of my pension and by my calculations HMRC has overtaxed me by several thousand pounds. What’s the quickest way to get my money back?

Sandeep

Tom Selby, AJ Bell Head of Retirement Policy, says:

You might think that when you access your pension pot in line with Government rules, you will pay the correct amount of tax on your withdrawals automatically.

This should be the case if you take a regular income from your pension, but if you take a single taxable withdrawal – either via drawdown or an ad-hoc lump sum (sometimes referred to as a ‘uncrystallised funds lump sum’ or UFPLS) – you will likely be overtaxed by HMRC.

Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.

This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, often landing hard-working savers with shock tax bills.

For those taking more than one withdrawal in the tax year, your tax code should automatically adjust. However, this is not the case where you only make a single taxable withdrawal. If you just take your 25% tax-free lump sum, you should not pay any tax regardless.

A staggering £925 million has been reclaimed by people who have filled out the correct forms since April 2015. In July, August and September of 2022 alone, more than £33 million was reclaimed by almost 10,000 people, with an average reclaim of more than £3,300.

The true figure is likely to be higher as many of those who have been overtaxed will not fill in one of these forms but wait for HMRC to correct the situation at the end of the tax year.

HOW TO GET YOUR MONEY BACK

If you are taking a steady stream of income via drawdown then you shouldn’t need to take any action, as HMRC will adjust your tax code to ensure that over the course of the year you are taxed the correct amount.

However, if you make a single withdrawal then you will either need to fill out one of three forms or rely on HMRC putting you in the correct position at the end of the tax year.

Which form you need to fill out will depend on how you have accessed your retirement pot:

If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z,
If you’ve only flexibly accessed part of your pension pot, then use form P55.

Provided you fill out the correct form HMRC says you should receive a refund of any overpaid tax within 30 days.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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