Thousands of people are being over-taxed on their pensions by £3,300 on average, as new figures show a huge spike in compensation from HM Revenue & Customs (HMRC).
New figures from HMRC show a 50% rise in people reclaiming overpaid pension tax between April and June 2022.
There were 7,412 people making these claims in the period, claiming £33.7million.
That works out at around £3,363 per claimant.
This overtaxing happens when workers and retirees try to take lump sums of cash from their retirement pot.
Pension rules let you take cash from a private or workplace pension from the age of 55.
These rules let you take up to 25% of your pension without paying tax.
Above that rate then you are taxed on withdrawals.
But many pension savers are being taxed at 'emergency' levels - meaning they are paying the taxman more than they should.
Normally HMRC spots this overtaxing and pays any excess back.
But the problem is this doesn't happen right away, and you will have to wait until the end of the tax year in the following April.
The only other option is to make a claim to HMRC to get the cash back faster.
Jon Greer, head of retirement policy at financial firm Quilter, said: "This emergency tax situation can be particularly frustrating for people trying to access their funds quickly, particularly if they don’t understand why it has happened. It arises due to an oddity of the PAYE system when people start to take money from their pension.
“HMRC will make a repayment automatically, however given that could take time to be processed it is best to make a repayment claim yourself to avoid waiting."
An HMRC spokesperson said: “Nobody will overpay tax as a result of taking advantage of pension flexibility. Individuals can claim back any overpayment due to an emergency tax code being applied immediately and we will repay this in 30 days.
“Anyone who does not claim will be automatically repaid at the end of the year.”
How to claim for overpaid pension tax
You have to make your claim directly to HMRC using one of several different forms , depending on your situation.
If you have taken all your pension cash and are retired, you need to return a P50Z form.
If you're working and have taken out some cash, you need a P55 form.
But if you are still working but have taken all your pension cash, you have to send HMRC a P53Z form.
Earlier this month The Mirror reported that more than 40,000 families are in line to get an average of £8,900 by claiming the underpaid State Pensions of dead family members.
Around 237,000 people have been underpaid the State Pension by almost £1.5billion due to a mistake at the Department for Work and Pensions (DWP).
The final figure could be even higher.
The DWP has been going back and repaying any underpayments it can find.
But sadly many of these pensioners have passed away without ever getting this extra money.
Now the DWP has launched a website that lets next of kin work out if their family members were not paid enough State Pension.
