HM Revenue & Customs (HMRC) has paid back £27m in overpaid pension tax to individuals during lockdown, down from £32m in Q1 and £47m in the same quarter last year.
Figures published by the tax authority at the end of July showed a mere 7,649 pension tax reclaim forms were processed between April and June, compared with more than 10,000 in the previous quarter and 17,000 in Q2 a year earlier.
Despite this, the average amount reclaimed per person hit a record high of £3,560 in Q2 – £845 more than during the same period last year.
The total amount reclaimed by people since 2015 has now reached £627m.
Tom Selby, senior analyst at AJ Bell, said: “While people taking a regular income should have their tax position sorted out automatically, those making a single withdrawal will either have to fill out one of three official forms or wait for HMRC to put them right at the end of the tax year.
“The overtaxation figures for April to June were always likely to be affected by Covid-19, with far fewer claims processed than usual.”
With the introduction of pension freedom rules, which came into force in 2015, savers have been able to take income from their defined contribution plans in any way they like.
But any withdrawals above the 25 per cent tax free amount are taxable at an individual’s marginal rate of income tax.
In some cases, the pension provider will already have a proper tax code for the beneficiary, if the saver has previously withdrawn money from their pension during the tax year.
However, where the provider does not have the correct tax code for the individual – which is in the majority of cases – withdrawals are taxed using a higher rate emergency tax code, which routinely results in an excessive tax deduction that has to be reclaimed later.