Brits hit with £44m in excessive taxes on pension pots due to HMRC errors

Official HMRC figures have revealed that errors in the tax system led to individuals being overcharged by £44 million due to excess tax taken when they withdrew funds from their pension pots between July and September. The issue arises because HMRC applies an excessive emergency tax rate to the first lump sum withdrawal, causing an individual to be thousands of pounds out of pocket as the system mistakenly assumes it's a regular income rather than a one-time payment.

Consequently, around 12,331 taxpayers were affected during the three-month period, with an average overpayment of £3,691 each. This tax fiasco originates from the clash between PAYE regulations and the pension freedoms rolled out in 2015, which let over-55s draw lump sums from their pensions. Helen Morrissey, pension expert at Hargreaves Lansdown, highlighted the ongoing headache: "The pension tax saga drags on well into its ninth year, with HMRC repaying almost £44.3m to people who were overtaxed on pension withdrawals over the quarter. It’s a situation that beggars belief, with around £1.3bn in total being refunded so far."

Morrissey further commented on the distress this causes: "You can get the extra money refunded, but this is not the point. Many of these people will not have been expecting this and the extra tax bill will have come as a nasty shock."

She also pointed out the impact this has on short-term financial plans: "It may even have undermined plans that people had for the money in the short term, and it takes time to sort out. It’s an extra complexity that no one needs and should have been resolved many years ago."

She explained: "The reason this happens is that you can be put on an emergency rate of tax whereby HMRC treats it as though that