Pension over-taxing

800,000 people are at risk of being over-taxed on their pensions, writes Steve Webb, director of policy at Royal London

Hundreds of thousands of people receiving company and personal pensions should check their tax code to make sure that they are not being over-taxed, according to a leading pensions firm.

Mutual insurer Royal London has published a new ‘good with your money’ guide to help individuals make sense of their tax code. The guide, entitled ‘Decoding your tax code’, includes a case study of a woman who is currently being over-taxed by HMRC because she draws income from a part-time job and an occupational pension and has been issued with the wrong tax code on her pension. Because her total income is under the tax-free allowance (£11,500 in 2017/18), she should not be paying income tax. But her pension provider has been told by HMRC to deduct income tax, and she stands to lose over £225 per year unless this is corrected.

Royal London estimates that around 800,000 people under state pension age are receiving pensions but should be non-taxpayers because their total income is below the personal allowance. The company is urging those individuals to check that they are paying no tax and to apply for a refund if they have been over-taxed. This may be a particular issue for those who have multiple sources of taxable income such as a wage and a pension or multiple pensions. In some cases, the over-taxation could have been going on for many years.

The guide’s author, Royal London director of policy Steve Webb, said:

“Most people are understandably baffled by the whole system of tax codes.  Employers and pension providers are issued with tax codes by HM Revenue & Customs and we generally assume they must be right. But HMRC can get things wrong and it is important that individuals understand their tax code and know how to spot mistakes and get things put right. Although computerisation of tax records is designed to help improve things, I have no doubt that there are many people still paying the wrong amount of tax, who should check their tax code as a matter of urgency.”

Founder of the charity ‘Tax Help for Older People’ Paddy Millard MBE said:

“Tax codes are probably one of the biggest single causes of confusion and problems among the people who contact us via our helpline. People should not simply assume that HMRC have got things right, but should check to make sure that they are paying the right amount of tax.”

It is estimated that there are around 30 million people in the UK who pay income tax, but only around 10 million of these fill in a tax return. For the rest, the pay-as-you-earn system, built around the use of tax codes, is designed to collect the right amount of tax over the course of the year. But if tax codes are incorrect, the wrong amount of tax will be collected. Where errors have been made, these can sometimes go uncorrected year after year, and individuals may be able to claim refunds for more than one year.

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