22 January 2025
If you are covering Q4 2024 HMRC tax overpayment statistics on flexible pension withdrawals and the news about the low earners net pay issue , please see the following comment from Jon Greer, head of retirement policy at Quilter:
Pension tax overpayments
“HMRC's latest figures reveal that pension tax overpayment refunds remain a significant issue, with over 14,600 repayment claims processed between October and December 2024, amounting to £49,514,458. This equates to an average refund of £3,390 per person. While these figures highlight an ongoing problem, HMRC’s plans to streamline tax coding from April 2025 are a welcome step towards reducing the administrative burden on savers and minimising overpayments in the first place.
“That said, the broader challenges of pension withdrawals persist. Many individuals are still accessing their pension savings to manage financial pressures. Such decisions, made in haste, could lead to unintended tax consequences and potentially compromise long-term financial plans.
“The root of the issue lies in a tax system that has struggled to adapt to the pension freedoms introduced in 2015. The PAYE system, while efficient for regular income, frequently applies emergency tax codes to one-off withdrawals, resulting in significant overpayments. While the planned reforms to automatically update tax codes for new pension recipients are promising, it remains to be seen whether they will fully address the complexities and inefficiencies of the current system.
“For those considering withdrawing funds from their pensions, professional financial advice is crucial. Advisers can help ensure that withdrawals are made tax-efficiently and aligned with long-term goals, avoiding unnecessary tax liabilities and financial setbacks.
“Until systemic reforms are fully implemented, retirees will continue to face the risk of significant overpayments and the need to navigate a cumbersome claims process to reclaim their money. HMRC’s efforts to address these issues are a step in the right direction, but there is still a long way to go to build a system that works seamlessly for savers.
Net pay
“In addition, the government’s confirmation of top-up payments for individuals affected by the low earners anomaly is a positive step. Approximately one million individuals in net pay schemes will benefit from an annual payment of around £70, helping to address long-standing inequalities in pension contributions. Importantly, the government’s decision to legislate so that these payments do not affect benefit entitlement or national insurance contributions ensures that low earners can benefit fully from this initiative without unintended financial consequences.
“However, the delay in payments for the 2024 to 2025 tax year until 2026 may cause frustration for those expecting timely support. While the government has committed to minimising the administrative burden on pension scheme administrators, clear and proactive communication with eligible individuals will be essential to managing expectations and ensuring the success of this policy. This initiative, while delayed, represents a meaningful step towards improving fairness and support within the pension system.”
