Nearly a million savers could be paying more tax on their pension than required, simply because they have been given the wrong tax code, Royal London has claimed.
The insurer estimated around 800,000 people under the state pension may be being taxed despite their income being below the personal allowance. The problem is particularly apparent where people were both working and withdrawing from their pension.
The firm's ‘Decoding your tax code' guide, published 26 April, pointed to one woman who earns an income from a part-time job as well as withdrawing from an occupational pension. She then pays £225 more in tax per year than necessary because HM Revenue and Customs (HMRC) told her pension provider to deduct income tax even though she has an income below the personal allowance.
Royal London director of policy Sir Steve Webb said: "Most people are understandably baffled by the whole system of tax codes. Employers and pension providers are issued with tax codes by HMRC and we generally assume they must be right.
"But HMRC can get things wrong and it is important that individuals understand their tax code and know how to spot mistakes and get things put right. Although computerisation of tax records is designed to help improve things, I have no doubt that there are many people are still paying the wrong amount of tax who should check their tax code as a matter of urgency."
The insurer also highlighted that just one in three people who pay income tax fill in a tax return, with the rest using the pay-as-you-earn (PAYE) system, which automatically assigns tax code. Where this is wrong, people may have been overpaying for many years but will not be able to claim back the tax.
Tax Help for Older People charity founder Paddy Millard added: "Tax codes are probably one of the biggest single sources of confusion and problems among the people who contact us via our helpline."
Royal London's guide comes after both AJ Bell and Aviva warned savers may be losing out to tax. AJ Bell claimed emergency tax codes were being applied to withdrawals under Freedom of Choice, costing more than £3,000 for a £10,000 withdrawal.
Meanwhile, Aviva said 90% of savers were losing out on tax relief by failing to recognise the benefits of putting a bonus into a pension scheme.
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