Martin Lewis issues warning over pension tax
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Pension saving is important for millions of people who are planning towards retirement and will often be undertaken years in advance. Britons are now able to access their pension savings in a flexible manner as a result of pension freedom rules. From the age of 55, individuals will be able to withdraw their pension either through a lump sum or in smaller amounts.
The first 25 percent can be withdrawn tax-free, one of the major benefits of saving into a pension.
However, above this, Britons are required to pay tax on the remaining 75 percent, at their specific rate.
There may, though, be instances where individuals end up paying more tax than they actually need to.
This usually occurs when a person is looking to withdraw money from their pension for the first time.
In this case, a pension provider can place an individual on an emergency tax code, especially if they do not have an up-to-date tax code for a person.
Data from HMRC has provided provided further insight into the matter of pension saving and tax.
From January 1 to March 31, 2021, HMRC has received claims from 7,387 people with regards to pension tax.
This means HMRC has ended up returning £23,183,421 in overpaid tax.
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People are able to claim back their overpaid tax on a pension straight away, but some may not realise the issue until later.
In many cases, the issue will be rectified at the end of the tax year, with HMRC automatically repaying individuals.
But for those who want their hands on repayment faster, making a claim could be the best solution.
HMRC repays the overpaid tax within 30 days to those who are making a claim.
There are various actions to take if Britons discover they need to claim a tax refund on a small pension lump sum.
- Use the online service
- Fill in an on-screen form, print and then post it to HMRC
- Print off and fill in a form by hand
For the first option, Britons are required to have a Government Gateway user ID and password, which they can set up when using the service if they do not have one already.
There are also a number of forms which will apply to different situations, and so pension savers should pay attention.
Form P53Z will be applicable to those reclaiming tax due to flexibly accessing their pension pot.
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But individuals should be aware this form will only apply if a pension pot has been totally emptied.
For people who have only used part of their pension, those who are not working, and those not receiving benefits, form P55 or P50Z will be best suited.
The Government advises using a different form, named P53, if one of the following circumstances applies:
- A person has a small pension taken as a lump sum
- A person has had a “trivial commutation” of a pension fund
However, P53 should not be used in the circumstances where a person has a Pension Flexibility payment and want to claim a refund of overpaid tax.
All of these forms are accessible through the Government’s official website to ease the process for those concerned.
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