Pension Tax Overpayments

sobrighton

At the beginning of the tax year, I accessed £20,000 by a flexible withdrawal from my pension pot (already taken full 25% tax free in previous years). As expected, Emergency tax kicked in and I was charged £8500 tax in my Tax period 1 pay from pension provider. However, this overpayment of tax is not claimable back from HMRC by P55 form, as I do not meet criteria from HMRC web site:

Pension tax overpayment

• you’ve flexibly accessed your pension pot but not emptied it

• you will not be taking regular or flexible payments before the end of the tax year

• the pension body is unable to make a tax refund

Second bullet applies to my circumstances as (like many others) will continue to make regular monthly drawdown from pension pot in the current tax year. Therefore, HMRC will only refund overpayment of tax by adjusting tax paid every month for the current tax year. Eventually reducing amount owed to myself in the next few months. 

This seems to me like a change that was introduced in January 2024, can others confirm this? I believe that there is in fact no way to claim back overpaid tax quickly while still receiving regular payments.

molerat

I believe it has always been the case that you cannot make a claim for a tax refund whilst receiving PAYE coded income from that same source.

[Deleted User]

sobrighton said:

At the beginning of the tax year, I accessed £20,000 by a flexible withdrawal from my pension pot (already taken full 25% tax free in previous years). As expected, Emergency tax kicked in and I was charged £8500 tax in my Tax period 1 pay from pension provider. However, this overpayment of tax is not claimable back from HMRC by P55 form, as I do not meet criteria from HMRC web site:

Pension tax overpayment

• you’ve flexibly accessed your pension pot but not emptied it

• you will not be taking regular or flexible payments before the end of the tax year

• the pension body is unable to make a tax refund

Second bullet applies to my circumstances as (like many others) will continue to make regular monthly drawdown from pension pot in the current tax year. Therefore, HMRC will only refund overpayment of tax by adjusting tax paid every month for the current tax year. Eventually reducing amount owed to myself in the next few months. 

This seems to me like a change that was introduced in January 2024, can others confirm this? I believe that there is in fact no way to claim back overpaid tax quickly while still receiving regular payments.

I recently made a similar withdrawal and reclaimed the tax overpayment via form p55. Funds were received in my bank in a timely manner. 
         I do not know I'd I will make further withdrawals this year and used p55 without problem. Similarly  in previous years. Regards 

Dazed_and_C0nfused

molerat said:

I believe it has always been the case that you cannot make a claim for a tax refund whilst receiving PAYE coded income from that same source.

Quite.  Isn't that the basic premise with PAYE, the pension payer will recalculate the tax due each time they make a payment and if tax has been overpaid in say month 1 this will reduce the tax that needs to be deducted in month 2. 

If necessary they will refund any excess tax from month 1 with the month 2 pension payment.

Assuming a cumulative code is in place of course.

squirrelpie

This seems like a good reason to take a small payment first to get a tax code assigned to the account. Too late for the OP, sadly.

Sarahspangles

squirrelpie said:

This seems like a good reason to take a small payment first to get a tax code assigned to the account. Too late for the OP, sadly.

I’m sure other posters have mentioned that their SIPP platform have advised this approach.

Albermarle

Dazed_and_C0nfused said:

molerat said:

I believe it has always been the case that you cannot make a claim for a tax refund whilst receiving PAYE coded income from that same source.

Quite.  Isn't that the basic premise with PAYE, the pension payer will recalculate the tax due each time they make a payment and if tax has been overpaid in say month 1 this will reduce the tax that needs to be deducted in month 2. 

If necessary they will refund any excess tax from month 1 with the month 2 pension payment.

Assuming a cumulative code is in place of course.

What happens if like me you overpaid tax by a few Hundred Pounds in April on my regular pension, due to a significant tax code error. Then the tax code is modified to the correct one, but the only regular income you have for the rest of the year is at a level  that you normally only say pay £30 a month in tax.
So even if for 11 months I then paid no tax, I would still be owed money ?
Or can the pension provider somehow retrieve the overpaid tax ? I guess not.

Phoenix72

Albermarle said:

Dazed_and_C0nfused said:

molerat said:

I believe it has always been the case that you cannot make a claim for a tax refund whilst receiving PAYE coded income from that same source.

Quite.  Isn't that the basic premise with PAYE, the pension payer will recalculate the tax due each time they make a payment and if tax has been overpaid in say month 1 this will reduce the tax that needs to be deducted in month 2. 

If necessary they will refund any excess tax from month 1 with the month 2 pension payment.

Assuming a cumulative code is in place of course.

What happens if like me you overpaid tax by a few Hundred Pounds in April on my regular pension, due to a significant tax code error. Then the tax code is modified to the correct one, but the only regular income you have for the rest of the year is at a level  that you normally only say pay £30 a month in tax.
So even if for 11 months I then paid no tax, I would still be owed money ?
Or can the pension provider somehow retrieve the overpaid tax ? I guess not.

You guess wrong, if in subsequent months the cumulative pension means you are due a refund of tax the pension company will refund it.......assuming you are on a cumulative tax code.

molerat

Albermarle said:

Dazed_and_C0nfused said:

molerat said:

I believe it has always been the case that you cannot make a claim for a tax refund whilst receiving PAYE coded income from that same source.

Quite.  Isn't that the basic premise with PAYE, the pension payer will recalculate the tax due each time they make a payment and if tax has been overpaid in say month 1 this will reduce the tax that needs to be deducted in month 2. 

If necessary they will refund any excess tax from month 1 with the month 2 pension payment.

Assuming a cumulative code is in place of course.

What happens if like me you overpaid tax by a few Hundred Pounds in April on my regular pension, due to a significant tax code error. Then the tax code is modified to the correct one, but the only regular income you have for the rest of the year is at a level  that you normally only say pay £30 a month in tax.
So even if for 11 months I then paid no tax, I would still be owed money ?
Or can the pension provider somehow retrieve the overpaid tax ? I guess not.

Your tax deduction can be negative so they pay you.  They don't simply credit the £30 you normally pay against the overpayment.  The "employer" will simply pay HMRC the total calculated tax from all on the payroll taking into account the positive and negative deductions.

For example a 20K pension payout in April on a 1257 code would result in £7378 tax deducted netting £12622.  In May there is a £1K payout which would result in -£1073 tax deducted and a net payment of £2073.  In that scenario with a regular £1K payment the net pay would be in excess of £1K every month with the March payment leaving the correct annual tax deducted of £3684 on the £31K for the year.

Albermarle

Thanks for your reply. I can now look forward to a £600 refund in my June pension. ( thinking back the problem came in May not April_

sobrighton

Thanks for all the replies, I think I now understand how the PAYE system works. In the future (next tax year) it makes more sense for me to ask my pension provider to stop regular monthly pension drawdowns and just take a lump sum at the beginning of the tax year, then reclaim overpaid tax with a P55. Then the money can go into an instant access savings account. A Self-Assessment tax return should sort out any further tax issues for me (tax on interest etc.).