HMRC is under increasing pressure to overhaul the way that it taxes pensions, as more and more evidence is being presented that savers are losing out. The number of people being overtaxed for making one-off withdrawals runs into the tens of thousands, with some people being overtaxed by as much as £15,000.
Now, following an investigation by the Daily Telegraph newspaper, the Commons Work and Pensions Select Committee, two former pensions ministers have added their voices to those who are calling for action to be taken. The problems come from the fact that the pension freedoms legislation that lets people take cash from their pension pots whenever they like conflicts with how HMRC normally taxes income. Its "pay as you earn" (PAYE) system works on the basis of regular payments.
"The way in which pension withdrawals are taxed is little short of a scandal," said Sir Steve Webb, pensions minister from 2010 to 2015.
"It cannot be right that HMRC knowingly overtaxed people to the tune of £100m per year and then expects thousands of individuals to know which form to fill to get their money back. "
Baroness Ros Altmann, pensions minister from 2015 to 2016, said the current system was attractive to HMRC because it meant it collected tax earlier.
"You might have had something important you were planning to use the money to pay for, then find it's not there. You can reclaim money but it's not straightforward and it's not fair to savers. This is undoing some of the benefits of the pensions freedoms."
In response to the calls for action, a HMRC spokesman said:
"Claimants presenting their 2017-18 P45 to their pension provider always pay the correct tax. In the event they don't, any discrepancy will be settled within 30 days of us being notified."