'Trap' in tax system wrongly overcharging people thousands of pounds

A 'trap' in the tax system means HMRC is wrongly overcharging people thousands of pounds for drawing cash from their pensions, experts have warned.

Under rules introduced in April 2015, anyone aged 55 or over can take regular or ad hoc sums from their pension pots. Using the assumption that they have no other income, they can withdraw up to £11,850 a year - the current annual personal allowance - without having to pay income tax on it.

However, unless the pension provider has an up-to-date tax code for you, it is obliged to impose an "emergency rate" of tax on any withdrawals of more than £987.50. This is a twelfth of the £11,850 allowance, as it assumes you will make the same withdrawal every month.

According to latest calculations by AJ Bell, while a £10,000 withdrawal, for example, should be tax-free - again, assuming no other income - if HMRC applied emergency tax the bill would be more than £3,000.

Someone withdrawing £50,000 could end up paying £12,000 more than they need to, the company added.

The average overpayment is £2,420.

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