State pensioners overtaxed by £3,691 each due to HMRC system 'flaw'

Pensioners are being overtaxed by £3,691 each due to an "inherent flaw" in the HMRC PAYE system. Recent data from HMRC reveals that £44.3million was repaid to people who were overtaxed on pension withdrawals in the third quarter of 2024 alone.

This ongoing issue has resulted in over 12,000 repayment claims being processed between July and September 2024. Jon Greer, head of retirement policy at Quilter said: "The tax system's inherent flaws place a heavy burden on retirees.

"The PAYE system, while effective for regular income, struggles to accommodate the way pensions are accessed under the freedoms introduced in 2015." Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: "You can try to mitigate this by making your first pension withdrawal a small one if possible.

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"If you do get landed with a bill, then you can get it rectified quickly by filling out a form and getting your money back as soon as possible." She added: "The extra tax bill will have come as a nasty shock. It may even have undermined plans that people had for the money in the short term, and it takes time to sort out.

"It’s an extra complexity that no one needs and should have been resolved many years ago." She said: "The pension tax saga" drags on well into its ninth year with HMRC repaying almost £44.3million to people who were overtaxed on pension withdrawals over the quarter.

"It's a situation that beggars belief with around £1.3billion in total being refunded so far." Mr Greer said: "A rush to take money out could result in unnecessary tax liabilities, and careful planning is essential to avoid making decisions that might compromise their retirement plans."

Greer continued: "Until the system is changed, we are likely to continue seeing many savers caught out and forced to reclaim significant sums of money."