Over half (59%) of 190 advisers surveyed by Abrdn listed removing emergency tax within their top three priorities.

A quarter (26%) said making the change would be useful to them and their clients.

Single or ad-hoc pension payments, or initial payments of regular pension income, are normally taxed on the ‘emergency month one basis’. This means the tax levied early on is usually far higher than it should be.

The week 1 / month 1 basis gives a proportion of any allowances and rates of tax for each pay period. However, it differs from the cumulative basis in that it ignores previous pay and tax. In effect all payments are taxed as though it was week 1 or month 1 of the tax year.

This basis ignores a client’s existing income tax position to date and uses a blanket approach which usually leads to an overpayment of income tax for most clients which they need to reclaim from HMRC.

Alastair Black, head of industry change at Abrdn, said: “Complexity in legislation and tax structures causes complexity in advice. This is ultimately a barrier to good customer outcomes.

“Emergency tax is clearly one of advisers’ biggest frustrations, and it could be something that becomes more and more of an issue in our current economic environment with an increase in flexible payments growing likely.

“With factors like rising inflation and an increase in the number of people wanting to continue working in retirement, income needs are likely to only vary more and more, potentially meaning more instances of clients making lump-sum withdrawals or changing their regular payments. This could result in being stung by up-front tax charges – which could be up to £1,000s for certain clients – that they would then have to reclaim. 

“In addition, if these withdrawals are needed for specific payments they may need to withdraw further income until they can reclaim the overpaid tax.

“The problems that arise from emergency tax are in large part due to it operating on a ‘month one basis’. A move to a cumulative tax basis, where tax is calculated based on overall year to date earnings would reduce the likelihood of any overpayment, or the need to reclaim.”

Two in five (39%) of the advisers surveyed said removing the lifetime allowance LTA would be their most desired tax and pension planning change.

One in ten (9%) listed the removal of the money purchase annual allowance as their priority reform.

Abrdn surveyed 190 UK financial advisers between 18 and 29 May.