HMRC has reported that it paid back over £56 million to pensioners due to over taxation of pensions between April and June 2023.
Around 16,000 reclaim forms were processed over the last three months, with an average reclaim of £3,551 - the second highest since 2015, when pensioners could first flexibly access their defined contribution pension pot.
HMRC taxes the first flexible pension withdrawal someone makes in a tax year on a ‘month one' basis, meaning it divides an individual's usual tax allowances by 12 and applies them to the withdrawal.
While those who take a regular income or make multiple withdrawals during the tax year should automatically be put right by HMRC, anyone who makes just one withdrawal will be left out of pocket.
Tom Selby, head of retirement policy at AJ Bell, said: "It is simply unacceptable that the Government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55."
Instead, he argued, it persists "with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.
"One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal."
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