Taxation of pension withdrawals simplified

Tax authorities are making it easier for savers to reclaim any tax they may have overpaid after taking a lump sum from their pension under the new freedoms.

From Monday, new rules came into force giving savers aged 55 and over new flexibility to take as little or as much as they wish from their defined contribution pension savings.

Those planning to strip their pensions in one go could end up paying tax at an emergency rate if they do not supply their provider with a P45, which are usually only issued when people stop working or are no longer claiming Job Seekers Allowance.

"Where a current P45 is held, the pension provider can deduct the correct amount of tax from payments as they are made," explains HM Revenue & Customs.

"Where a current P45 is not held, the pension provider will have to deduct tax from the payment at a temporary rate (called emergency rate).

"In most cases, this will mean that the person making the withdrawal may be due a tax refund."

HMRC said that savers due a refund could wait until after the end of the tax year, when HMRC will reconcile their account and make any repayment owed as part of its normal pay-as-you-earn process, or they could claim the tax back in the same year.

On Monday, HMRC introduced new forms which will allow people to reclaim overpaid tax on pension income payments, within five working weeks of receipt of the request, based on HMRC's "commitments".

"This sensible change of practice is good news for many consumers," said Adrian Walker, retirement planning expert with Old Mutual Wealth.

"The forms and new process will allow any overpaid tax to be recovered much quicker, rather than having to wait until the next tax year or your next income payment."

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"While this makes the issue of pension taxation less problematic from a consumer perspective, it will still be a hurdle that many find challenging," he added.

"Sending complex forms to the Revenue may not be something everyone will find straightforward. And the overpaid tax will not be returned immediately."

Which form to use?

Individuals wanting to reclaim overpaid tax have a choice of three forms depending on their circumstances:

P50Z - if they have no other income

P53Z - they have other taxable income in the tax year

P55 - they've taken a pension flexibility payment that does not use up all of that fund

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