Anyone over 55 could owe between £3,000 and £54,000 due to the emergency tax trap

OLDER households are being urged to check if they owe up to £54,000 in overpaid tax.

Pensioners who take out their defined contribution pension in one go from the age of 55 can get money back.

HM Revenue and Customs taxes these types of pensions immediately and at a higher “contingency” rate.

You may see that you have temporarily deducted large amounts, leaving you with no money.

But fortunately you can reclaim excess tax paid from the government by completing one of the three forms. Below you will find more details.

Recent figures, obtained through a Freedom of Information (FOI) request from pension and investment provider Royal London, show that 9,700 defined contribution pensioners had £5,000 or more reclaimed in tax overpayments in the 2022/2023 tax year.

More than 2,000 demanded more than £10,000 back, while 300 received a check for more than £15,000.

It found that the average refund per saver was £3,062, with the top 100 recoveries averaging as much as £54,185.

Clare Moffat, pensions expert at Royal London, said: “Of course this could come as a huge shock to some people, especially if they had set aside the money for something specific, such as a holiday or improving their home.

“Suddenly, a lot of the money they thought was coming to them has actually gone to paying emergency taxes, which they probably didn’t expect.”

How to get the money back

Fortunately, you can get this back if you have made a large withdrawal from your defined contribution pension.

You can wait for HMRC to check your tax code and process a refund at the end of the tax year, but this may take some time.

Alternatively, you can complete one of three forms: a P55, P53Z or a P50Z, all of which can be found on the government website.

You can print the forms and then return them to HMRC using the address at the bottom of the form.

Or you can request the refund online.

You will need to complete a P55 if you have made a partial withdrawal from your pension and do not intend to receive further payments before the end of the same tax year.

You must also inform HMRC of any other income you expect to receive that year.

If you have taken your entire pension in cash, you will need to complete a P53Z if you are still earning income, or a P50Z if you have stopped working.

Please note: you can avoid having to pay emergency tax on a lump sum pension withdrawal if you do not need a large amount immediately.

Clare explained: “A much better approach is to make your first withdrawal modest and this will determine how much tax you pay on future withdrawals.”

Do you have a money problem that needs to be solved? Get in touch by emailing money@the-sun.co.uk.

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