The former pensions minister, Sir Steve Webb has called for a complete overhaul of the pension tax overpay system, which he calls "absurd". New figures that have been released by HM Revenue and Customs reveal that tax overpayments since the new pension freedoms came into force in 2015 have now passed the £280 million mark. In the first quarter of this year, more than £22 million had to be repaid by HMRC where it had collected too much tax from those people who had flexibly accessed their pensions.
Currently, in most cases, withdrawals are taxed using an "emergency" tax code that then routinely results in an excessive tax deduction that needs to be repaid. In the first quarter of this year, more than 10,000 people have had to claim back overpaid tax.
"These quarterly figures are a regular reminder of the absurd way in which pension withdrawals are taxed," said Webb. "HMRC is perfectly happy to over-tax tens of thousands of people each year and make them jump through hoops - having to choose between three different forms to complete and then wait to get their money back."
"This is a system run for the convenience of HMRC, not the taxpayer. It is time to move to a simple system where basic rate tax is withdrawn at source and any adjustment is made through end-of-year tax returns."
An HMRC spokesperson, said: "Claimants presenting their 2018/19 P45 to their pension provider will pay the correct tax. In the event they don't, any discrepancy will be settled within 30 days of HMRC being notified."
They also added that were they to follow Sir Steve Webb's suggestion, this would involve pushing people into self-assessment, leaving taxpayers with large unexpected tax bills at the end of the year.