The latest official figures show that between January and March this year, HMRC processed over 15,000 tax refund claims to people who accessed their pensions early
Thousands of pensioners received payments worth around £2,800 on average after overpaying tax on their pensions. Since reforms were introduced in 2015, retirement savers who make an initial withdrawal from a “defined contribution” pension pot are taxed by HMRC.
However, instead of the normal income tax rate, HMRC issues an emergency tax rate as if this person will pull out this amount from their pot every month. This means they pay thousands of pounds more in tax than they actually owe, which they then need to claim back. For example, if someone pulls out £10,000 from their pension pot one month, HMRC taxes them as if they will be taking out £120,000 that year.
The latest official figures show that between January and March this year, HMRC processed over 15,000 tax refund claims to people who accessed their pensions early. According to the data, the average reclaim sat at £2,881. This is the lowest average claim for six years, according to analysis from AJ Bell. The amount refunded back by HMRC totalled £44million over the same three month period.
To get the overpaid tax back, people either have to make a claim themselves or wait for HMRC to review the self-assessment payments and then issue a refund.
The exact amount you can get back if you overpay obviously depends on how much money you took from your pension, what other income you have, and your tax rate. Although people are not permanently out of pocket, it can often be several months before the emergency tax has been corrected.
Over £1.4 billion has now been reclaimed by people overtaxed on pension withdrawals since the rules changed in 2015. Experts have called for reform for years, and after the latest release, many have reiterated the call again, describing the current method as “outdated”.
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Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket, with the latest official figures revealing over £1.4billion has now been repaid to people who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back.
“The average reclaim has fallen slightly this quarter to £2,881, its lowest level in almost six years. Despite this, these figures show too many people are still being overtaxed because of the Revenue’s outdated approach.
“These figures are likely to be only the tip of the iceberg, however, as they only capture those who fill in the relevant HMRC reclaim form. In reality many more people will use the quicker process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order at the end of the tax year.
Tom says HMRC has offered a “glimmer of hope” to those who take a regular drawdown income. From April 2025, the government improved its tax code process so that these people will be moved from an emergency code to paying the right amount of tax more quickly.
However, he noted that it doesn’t help those taking a one-off withdrawal, as they will continue to be overtaxed. He added: “We have only just blown out the candles on the cake celebrating 10 years of pensions freedoms.
It is simply unacceptable that after all this time the government has still not managed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.
“One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.
“Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days. If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”
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