Early tax refunds when cashing in small pensions
In the past, pensioners who had to complete a tax return and who wished to cash in a small pension had to wait until after they had filed their return before they could get a refund of any excess tax deducted from the lump sum. Now, following LITRG representations, HMRC have agreed that pensioners in self-assessment may claim an immediate refund of overpaid tax when cashing in a small pension.
When it is time to take your pension, you will normally be given the option of taking a tax free lump sum and a pension for life. However, if your pension pot is small (which means that all your pension funds have a total value of £17,500 or less) then you can take the whole amount as a cash sum. Although 25% of the lump sum is tax free, tax is deducted under PAYE from the rest of the lump sum. An emergency code number may be used in working out how much PAYE is due which makes it more likely that you will overpay tax and be due a refund.
Many pensioners on low incomes, who were required to complete and file self-assessment returns after the end of the tax year, were only then able to secure their refund. LITRG were concerned that they were experiencing hardship as a result of the delay.
HMRC are to be praised for listening to our plea for in-year refunds which they have now implemented from April 2009. We have updated the article we published in June 2008 with details of how to go about making a claim.
Contact Name: Jan Tish (0844 579 6700 Fax 0844 579 6701)