The Cosmic Watchdog

Since 2015, pensioners have been losing thousands due to certain rules, however, they are now celebrating a win as HMRC is set to scrap a costly tax blunder that left millions of them £3,900 worse off.

The issue originated from emergency tax codes applied to state pensions by the Department for Work and Pensions (DWP). This was introduced as part of the pension reforms in 2015.

As a result, HMRC deducted extra tax from additional amounts withdrawn from a person’s pension fund, assuming this withdrawal would be ‘month one’ in a series of payments throughout the rest of the tax year.

Pensioners then had to reclaim the overpaid tax themselves.

HMRC has now announced that, from April, these emergency tax codes will be replaced with regular ones. This should ensure the correct amount of tax is deducted in real time.

The HMRC newsletter confirming this change stated: “We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year.

“Those who, for the first time, start to receive ongoing pension payments will benefit from this change. There is no need to contact HMRC and once a tax code has been changed we’ll inform customers by letter or digitally if they’ve signed up for paperless in the HMRC app or online.”

It also mentioned that the department is currently working on further improvements.

Tom Selby, director of public policy at AJ Bell, told Birmingham Live: “The Government has failed to adapt the tax system to cope with the fact Britons are able to access their pensions flexibly from age 55. Instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds. And requires them to fill in one of three forms if they want to get their money back within 30 days.”

While state pension payments aren’t directly taxed, personal or workplace pension withdrawals can be.

According to Money Helper, each individual can take up to 25% of their pension completely tax-free from the age of 55. However, withdrawing more than this could result in tax bills, which is what the emergency tax codes that are set to be scrapped in April aim to address.