Thousands of people withdrawing cash urged to claim refund worth average £3,800

Thousands of older Brits are being urged to check if they're owed money from HMRC worth an average of around £3,800.

You may be due cash back from the taxman if you were hit with emergency tax after dipping into your pension for the first time. The latest figures show HMRC repaid £48.7million in overpaid pension tax between April 1 and June 30.

A total of 12,767 claims were processed in total, with an average payment of £3,815. You risk being charged emergency tax if HMRC treats your first pension withdrawal as if it will continue to be paid each month - even if you don't make any further withdrawals that tax year.

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Under pension freedom rules introduced in 2015, you can normally withdraw up to 25% of your pension tax-free from the age of 55, and then you’re charged your normal income tax rate on the remaining 75%. It comes after reports DWP state pensioners are set to be given 'extra £352' completely free.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The overpaid pension tax saga continues to drag on. In just three months, HMRC has repaid a whopping £48.7million to people who paid too much tax for simply accessing their pension.

“With an average refund of around £3,800, these refunds amount to a significant chunk of change. The problem hits people who are taking a lump sum from their pension for the first time.

“They get taxed on what is known as a 'month one' basis, which means it’s treated as though the same amount will come out every month. This results in a far bigger tax bill, which can come as an unpleasant surprise or even de-rail people’s retirement plans.“

Can I claim overpaid pensions tax back?

You can claim back the difference between how much you paid in emergency tax, and how much you should have paid with your normal tax rate, by filling out a form online. Alternatively, you can wait for HMRC to repay you at the end of the tax year.

You'll need to fill out one of the following three forms, depending on how you have accessed your retirement pot.

• If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z

• If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z

• If you’ve only flexibly accessed part of your pension pot then use form P55

Ms Morrissey continued: “There are things you can do to mitigate it. For instance, you could make your first pension withdrawal a relatively small one.

“However, if you were looking to take a lump sum to fund travel or home renovations, for instance, you will need to plan ahead to make sure the money you take isn’t whittled away by tax which could delay your plans.

“If you do get clobbered with a big tax bill, then you will need to fill out one of three forms so that HMRC can process the refund. Otherwise, you can wait until the end of tax year.”