HMRC has paid back £48.5million after overtaxing Brits on pension withdrawals.
Over 13,700 people put in a claim for overpaid tax in just three months – a rise of 11% from the same period last year.
The eyewatering figure was reclaimed in July, August, and September this year.
It brings the total of repayments for overpaid tax on pensions to £1.5bn since Pension Freedom rules were introduced in April 2015.
They came into force to offer more flexibility on how people aged 55 and over can access their defined contribution pension savings, but critics say the rules penalise those wanting to take out a lump-sum withdrawal.
You’re typically allowed to take the first 25% tax-free, and then everything after that is taxed at the usual income tax rate.
If you take out a large chunk of your pension, you’ll automatically be put on an “emergency” higher tax rate.
Hargreaves Lansdown head of retirement analysis Helen Morrisey explains: “The problem hits people who are taking a lump sum from their pension for the first time.
“They get taxed on what is known as a ‘month 1’ basis, which means it’s treated as though the same amount will come out every month.”
Tom Selby, director of public policy at AJ Bell, said: “Now over a decade since pension freedoms and flexible pension withdrawals were introduced, HMRC is still yet to address one of the longstanding flaws in its approach to taxing those who choose to flexibly access their hard-earned pension pots.”
But Mr Selby warned that these figures are likely to be “the tip of the iceburg” as they only include the people who have filled out the HMRC reclaim form.
He added: “In reality, many will be reliant on HMRC putting their affairs in order at the end of the tax year.
Quilter head of retirement policy Jon Greer said: “A decade after the introduction of pension freedoms, it remains extraordinary that thousands of people are still being overtaxed every quarter simply for accessing their own savings.
“The system continues to work against the very flexibility it was designed to promote.”
He added that the PAYE system was built for regular employment income, not one-off pension withdrawals.
How to avoid overtaxation for single pension withdrawals
One of the best ways to avoid being stung by overtaxation is to take a notional withdrawal first.
This should ensure HMRC applies the correct tax code on the second, larger withdrawal.
How to check if you’re owed a refund
Check your pension payslip or P45/P60, check your tax code, and use the relevant HMRC form to see if emergency tax was misapplied:
- Form P50Z: If you’ve emptied your pension pot and have no other taxable income (other than the State Pension).
- Form P53Z: If you’ve emptied your pension pot but have other taxable income (like a salary or other benefits).
- Form P55: If you’ve only accessed part of your pension pot and will not be taking any more payments during the current tax year from that scheme.
Once you’ve chosen and filled out the correct form online via your Personal Tax Account on the GOV.UK website.
If you’d prefer, you can print the form and post it to HMRC.
It’s worth mentioning that HMRC should automatically review your records once the tax year ends on April 5, 2026.
The authority will send you a P800 calculation if you are owed a refund.
HMRC says it aims to process refunds within 30 days.
What is emergency tax?
Emergency tax is a temporary way that HMRC uses to take income tax from your wages or pension when they don’t yet have all the information they need about your income.
It’s called “emergency” tax because it’s a quick fix — not your final tax situation. #
Once HMRC gets the correct details, your tax code will be updated, and any overpaid tax will usually be refunded.
Why I am in the wrong tax code?
There are several reasons why you might be on the wrong tax code, including if you’ve started a new job and HMRC has not received your income details in time.
You might also be on the wrong code if you’ve started working for an employer after being self-employed, or you’re working more than one job at a time.
If you are on the wrong code, the tax office will often put you on an emergency tax code until you contact them about changing it.
Bear in mind, in some cases you might have been put on the wrong tax code and be underpaying and owe HMRC money.
In any case, you’ll want to correct it when you can so you’re paying the right amount going forward.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “It’s a relatively straightforward process and this money is rightfully yours, so don’t hang about – make a claim as soon as you can.”
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
