The taxman makes a lot of mistakes, and the strange thing is you will be chased if you owe money but not as much effort goes into refunding your cash if you overpay for some reason.
Around 11 million people are caught in the self-assessment system – and each year HM Revenue and Customs must put right around 3 million errors.
One of the most common mistakes is retirement savers pay too much income tax when they draw money under new pension freedom rules because of a glitch in the system that HMRC will not put right.
Every year, HMRC will send you a tax coding notice. This tells you how much money you can earn without paying tax over the course of the year.
Problem with emergency tax
Pension providers use this notice to work out how much tax you pay on withdrawals from your savings.
But if you already have a job or cannot provide the coding, they must apply emergency tax.
Emergency tax rules say the first amount you take is considered your monthly pay and income tax is deducted as if you earned that amount every month for a year.
So, taking £4,500 a month will be taxed as an annual salary of £54,000 even if you only intend to draw £4,500 during the entire year.
Claiming back overpaid tax
The good news is you can claim the tax back by completing a form P50 either online or by post – unless you are an expat when you should complete a form P85.
HMRC should correct the error within 30 days and repay the tax in full with interest.
Considering this, even a modest pension withdrawal could lead to an unexpected tax bill, and taking £3,750 or could mean a 40% tax deduction as the pension firm will apply income tax as if you were in the higher rate bracket.
And if you need the gross amount of your withdrawal, you need to factor in at least six weeks to receive the refund back into your bank account as available to spend.
