Is your private pension being overtaxed?

Access to pension savings

At one time taking your private pension was synonymous with retirement, but these days you can draw on your pension savings when you reach 55 (this will change to 57 in April 2028). This has become very popular which has indirectly led to tax problems for many, especially those who draw some or all of their pension savings while continuing to work. The good news is that contrary to alarmist reports in the media, any tax issues are relatively easy to resolve.

Why is there a problem?

While 25% of your pension savings can be taken tax free, the remainder is liable to income tax. The tax system has to account for this, and with the best will in the world it’s unlikely that it will get it spot on from day one, which is why individuals often pay too much or too little tax on their pension income, but only at first. Tax problems only linger if you don’t know how to correct them.

Too much or too little tax?

It’s usually very easy to tell if you’ll initially pay too much or too little tax ahead of receiving pension income. The following will help you decide:

• you continue to work and take pension income - usually too little tax
• you don’t work but are receiving your state pension - usually too little tax
• you will stop work and not take your state pension - usually too much tax.

Don’t assume that the media reports saying that most people will pay too much tax are relevant to you. If you continue to earn or receive your state pension, it’s far more likely that you’ll pay too little tax. There’s nothing worse than expecting a refund only to be told by HMRC that you actually owe more.

Initial tax deductions

Tax on private pension income is collected through the PAYE system. This means the pension company uses a tax code to work out how much to deduct. Almost invariably it will initially use the standard PAYE emergency code. Again, contrary to what you might have read, an emergency code is more likely to result in too little tax being deducted and not too much.

Correcting your tax

As soon as you know when your first pension payment will be paid contact HMRC and advise it of the details. It probably won’t be able to inform the pension company of the correct PAYE code in time for the first payment but hopefully it will in time for the next one.

If you think you have paid too much tax on your pension income, you don’t have to wait until the end of the tax year to reclaim it. HMRC has a special online service for making a claim or you can download and fill in one of the pension tax repayment claim forms. The corresponding website was updated in January 2024 and now provides useful information about when you can and can’t reclaim tax that’s been deducted from your pension.