HMRC have promised to apply the correct tax codes to pension pot withdrawals from April 2025. The change was announced in its 'Pensions schemes newsletter 166' following criticism of the current system that forces pensioners into reclaiming the tax.
Pension freedoms were introduced in 2015 allowing lump sum withdrawals. In most cases, HMRC would automatically dock tax under an emergency tax code rate, rather than under a cumulative tax system like PAYE.
This resulted in taxpayers having to reclaim their cash from HMRC themselves or wait until after the end of the current tax year for a rebate. In the past ten years, over £1.3 billion was reclaimed by pensioners from HMRC.
HMRC stated that people will pay the right amount of tax from the outset, as they will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code.
There is no need to contact HMRC and once a tax code has been changed customers will be informed by letter or digitally if they’ve signed up for paperless in the HMRC app or online.
Useful guides on this topic
Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?
Pensions: What happens when you die?
What happens to your pension when you die? What tax is due by your estate? Will your family have to pay Income Tax if they receive your pension going forward? What can you do to mitigate any tax charges?
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