Her Majesty’s Revenue and Customs (HMRC) has initiated a major tax refund operation, returning millions of pounds to pensioners who were inadvertently overcharged tax during pension withdrawals.
The issue stems from the application of emergency tax codes, which often result in significantly inflated deductions from lump sum pension drawdowns.
In the 2023/2024 tax year alone, tens of thousands of pensioners were affected. Some individuals received refunds of more than £100,000, with HMRC now working to simplify and accelerate the refund process.
With major policy changes ahead, especially regarding inheritance tax, it has never been more important for pensioners to understand how pension withdrawals are taxed — and how to recover what they’re owed.
Why Are Pensioners Being Refunded by HMRC?
Thousands of pensioners in the UK are currently receiving tax refund from HMRC after being overcharged on pension withdrawals. The refunds are the result of how emergency tax codes are applied when individuals begin accessing their pensions for the first time.
Instead of using a personalised annual tax code, HMRC often applies a generic code that can significantly inflate the tax due on lump sum withdrawals.
According to data obtained by Royal London through a Freedom of Information request, approximately 60,000 pensioners were refunded for tax overpayments in the 2023/2024 tax year. This figure highlights the scale of the problem and how many retirees are affected by what is essentially a systemic tax coding issue.
Among those refunded:
- Over 11,700 pensioners received refunds greater than £5,000
- More than 2,400 individuals were reimbursed upwards of £10,000
- A smaller group of 25 pensioners received refunds averaging £106,900
This is not an isolated issue affecting only high net worth individuals. Many average-income pensioners were also caught off guard by unexpected tax bills that disrupted financial planning.
Clare Moffat, a pension expert at Royal London, highlighted how emergency taxation can be a major setback, stating that these tax deductions not only surprise individuals but can derail their long-term retirement strategies.
How Does Emergency Tax Affect Pension Withdrawals?
Emergency tax is a common yet often misunderstood feature of pension withdrawals in the UK. It affects thousands of individuals every year, particularly those withdrawing money from their pension pots for the first time. Understanding how and why it is applied is critical to avoiding costly overpayments.
The Concept of Month-one Tax Coding
When someone accesses their pension savings for the first time, HMRC typically applies a month-one tax code. This temporary measure is designed to prevent underpayment of tax, but in practice, it frequently results in overpayment.
Under this system, HMRC treats the initial pension withdrawal as if it will be repeated each month for the remainder of the tax year. This means that a one-off withdrawal is annualised, leading to an inflated assumption about the individual’s annual income.
For example, if a pensioner withdraws £20,000 in one go, HMRC assumes this will happen every month. As a result, the system estimates an annual income of £240,000, pushing the pensioner into a much higher tax bracket, even if that withdrawal was a single, non-recurring event.
Tax-free Allowance and the Taxable Portion
The UK pension system allows 25% of a pension pot to be withdrawn tax-free. The remaining 75% is subject to income tax, calculated according to the individual’s tax code and total annual income. When the emergency code is used, however, personal allowances and real-world income are not accounted for accurately.
This discrepancy is what causes the overcharging. For many pensioners, the result is the deduction of thousands of pounds more than they actually owe.
Common Situations That Trigger Emergency Tax
There are specific scenarios where the emergency tax system is more likely to be applied, including:
- Individuals taking a pension withdrawal for the first time after turning 55
- One-time lump sum withdrawals for debt repayments or large purchases
- Withdrawals triggered by unexpected life events, such as illness or job loss
- Individuals with no prior income or PAYE history in the current tax year
In each of these cases, HMRC lacks a complete income history, which prompts the system to apply a standard emergency tax code. This is particularly burdensome for pensioners who may be relying on the withdrawn amount to fund time-sensitive expenses.
The Psychological and Financial Impact
Beyond the financial implications, emergency tax can cause distress and confusion among pensioners. Many are unaware of how the tax will be calculated and are shocked to find significantly less in their bank accounts than expected.
This can derail personal financial plans, delay essential purchases, or create uncertainty about long-term retirement funding. Some individuals may even refrain from making future withdrawals out of fear of repeated overcharging.
What Were the Most Common Pension Tax Refund Amounts?
The HMRC data from 2023/2024 offers a detailed breakdown of the refund amounts issued to pensioners. The vast majority of refunds were below £5,000, but a noteworthy number were far higher, reflecting severe overpayment due to the emergency tax process.
Below is a table illustrating the distribution of refunds:
Breakdown of HMRC Pension Tax Refunds (2023/24)
| Refund Amount Range | Number of Pensioners | Observations |
| £0 – £4,999 | Approximately 48,300 | Most refunds fall in this category |
| £5,000 – £9,999 | Around 11,700 | Indicates moderate overcharging |
| £10,000+ | About 2,400 | Substantial overpayments |
| £100,000+ | 25 | High-value cases, average £106,900 |
The average refund across all claims was £3,342, which is £280 more than the previous year’s average. This increase suggests that the extent of overcharging may be growing year-on-year.
For individuals who were overcharged by tens of thousands of pounds, the refund process has significant consequences. In some cases, retirees were forced to delay important decisions or financial commitments until the refund was received.
How Has HMRC Responded to These Overpayments?
In light of growing criticism and increasing volumes of complaints, HMRC has begun to implement changes to reduce the frequency and severity of pension tax overpayments. However, many argue that the system remains reactive rather than proactive.
Automatic Tax Code Updates
One of the most notable policy changes announced by HMRC is the automation of tax code updates for pension withdrawals. From April 2025, individuals accessing private pension income for the first time will have their tax codes updated automatically based on real-time information.
This change is intended to eliminate the reliance on emergency tax codes in many cases, reducing the need for pensioners to reclaim large overpayments after the fact. The updated system is expected to apply the most accurate tax code possible at the point of withdrawal.
Although this is a welcome development, its full impact will depend on how efficiently HMRC implements the change and how quickly pension providers adopt the new data-sharing procedures.
Refunds Through Reclaim Forms
While HMRC does eventually refund overpaid tax, the onus has traditionally been on the pensioner to initiate the process. Most people must complete and submit one of three specific forms depending on their situation:
- P55: Used when only part of the pension pot is withdrawn and income continues
- P50Z: For pensioners who withdraw the entire pot and have no other income
- P53Z: For those who withdraw their full pension but continue to receive other taxable income
These forms can be submitted online or by post. Online submissions are typically faster, with refunds processed within approximately 30 working days, although some cases may take longer.
Delays and Bottlenecks in the Refund Process
Despite having formal procedures in place, HMRC has struggled to manage refund requests efficiently, particularly during peak periods such as the end of the tax year. Processing times can stretch beyond a month, especially if claims are incomplete or require additional verification.
In some cases, pensioners have reported delays of several months, during which time their overpaid tax remains inaccessible. For those who rely on the withdrawn funds to cover essential living costs, these delays can be more than just inconvenient—they can be financially destabilising.
HMRC’s Official Position
HMRC has publicly stated that no one permanently overpays tax as a result of pension flexibility, reiterating that full refunds are available for anyone who submits the correct forms. However, this stance does not address the emotional or financial hardship caused by delayed payments or the complexity of the reclaim process.
Their spokesperson explained that individuals are free to reclaim overpaid tax at any time and that the emergency tax system is designed to protect the Treasury against underpayments rather than penalise taxpayers.
Industry Response and Expert Criticism
Pension experts, financial advisers and consumer rights organisations have been vocal in criticising the current approach. They argue that HMRC’s system is outdated and lacks the responsiveness required in an era of flexible pensions.
Clare Moffat, head of intermediary development at Royal London, emphasised that the tax applied under emergency codes can completely derail someone’s financial plans. In many cases, people are caught unaware and are left scrambling to understand a highly technical process during what should be a straightforward financial decision.
Many professionals are calling for a fully integrated, real-time tax calculation model that automatically applies the correct tax treatment based on an individual’s full financial history, including previous income, employment status, and pension arrangements.
What Impact Will the 2027 Inheritance Tax Change Have on Pension Withdrawals?
Beginning in 2027, the UK government will alter the way inheritance tax applies to unused defined contribution pension pots. Currently, these funds are often exempt from inheritance tax if passed on upon death. Under the new rules, they may be counted as part of the deceased’s estate and taxed accordingly.
This change is likely to influence how pensioners use their funds in retirement. Anticipating these inheritance tax liabilities, more people may choose to withdraw larger amounts earlier in life to avoid leaving behind taxable assets.
This behaviour, in turn, could lead to an increase in lump sum withdrawals, which are more vulnerable to emergency tax codes. Pensioners reacting to inheritance tax changes could therefore face even higher rates of initial overpayment, making awareness and planning even more important.
Financial advisers are already reporting increased demand for strategic pension withdrawals aimed at minimising future tax exposure. In response, there’s a growing need for HMRC to ensure that its tax code updates and refund processes keep pace with shifting consumer behaviour.
How Can Pensioners Reclaim Overpaid Tax Efficiently?
While HMRC states that overpaid tax will eventually be refunded, the quickest route to reimbursement is through a formal claim. Pensioners should not rely solely on automatic processes, particularly if a large sum has been withheld.
To reclaim overpaid tax efficiently, pensioners should:
- Identify which reclaim form applies to their situation (P55, P50Z, or P53Z)
- Gather required documents such as pension withdrawal statements, P45 or P60
- Submit the form either through the HMRC website or by post
- Monitor the status of the claim to ensure it’s processed
The following table offers a simplified reference guide for reclaim forms:
Pension Tax Reclaim Form Guide
| Form Name | When to Use | Other Income Present? |
| P55 | Partial pension withdrawal | Doesn’t matter |
| P50Z | Entire pot withdrawn, no other income | No |
| P53Z | Entire pot withdrawn, other income present | Yes |
Using the correct form is essential. Mistakes or omissions can lead to delays, additional correspondence, or even rejection of the claim. Submitting online generally speeds up processing times compared to postal applications.
Should Pensioners Seek Financial Advice Before Large Withdrawals?
Taking financial advice before making a large pension withdrawal is strongly recommended. Emergency tax issues often stem from a lack of awareness of how income tax is calculated on pension drawdowns. Advisers can help individuals structure their withdrawals more tax-efficiently and avoid large one-time payments that result in heavy deductions.
Advice can also help pensioners:
- Plan withdrawals around other income sources to manage tax brackets
- Understand how pension flexibility works
- Prepare for future tax changes such as the 2027 inheritance tax reform
- Preserve their retirement income for long-term needs
In many cases, the cost of professional advice is outweighed by the potential tax savings and reduced administrative burden.
What Can Be Done to Avoid Emergency Tax on Pensions?
Although emergency tax cannot always be avoided for the first withdrawal, there are several strategies pensioners can use to minimise its impact:
- Make smaller initial withdrawals so that any overpayment is minimal
- Wait for HMRC’s automatic tax code update before making a large withdrawal
- Contact HMRC in advance to confirm your tax code
- Split large withdrawals into smaller, staged payments
- File a reclaim form promptly if overcharged
Being proactive is essential. Many pensioners are unaware that their withdrawal may be taxed at a higher rate initially, leading to frustration when the expected amount is not received.
Conclusion
The revelation that thousands of UK pensioners were overcharged tax on pension withdrawals has brought attention to a long-standing flaw in the emergency tax system. While HMRC is now actively issuing refunds and revising its procedures, the burden still falls on many individuals to understand the process and reclaim their overpaid tax.
With changes to inheritance tax on the horizon and pension flexibility increasingly used, pensioners must be vigilant. Seeking financial guidance and staying informed about HMRC procedures can prevent future financial strain and ensure that pension savings are used as intended — for a secure retirement.
Frequently Asked Questions
What is an emergency tax code and why is it applied to pensions?
An emergency tax code is used when HMRC doesn’t have up-to-date income details for a pensioner. It assumes a regular monthly income and is often applied to first-time pension withdrawals, resulting in excessive tax deductions.
Can you avoid being overcharged tax when withdrawing from your pension?
While not always avoidable, overcharges can be reduced by making smaller withdrawals, waiting for a tax code update, or seeking professional advice.
How long does HMRC take to refund pension overpayments?
Refunds typically take around 30 working days, but this can vary. Using the correct reclaim form and submitting accurate documentation helps speed up the process.
Is the 25% tax-free portion always guaranteed?
Yes, under current UK pension rules, the first 25% of a pension pot can be withdrawn tax-free. The remaining 75% is taxed as income.
What forms do you need to claim a pension tax refund?
The form depends on your situation. Most commonly, it’s Form P55 for partial withdrawals, P50Z if you’ve no other income, or P53Z if other income is present.
Are pension withdrawals always subject to income tax in the UK?
Yes, aside from the 25% tax-free portion, all pension withdrawals are subject to income tax based on your total earnings in the tax year.
Will the new HMRC tax code system stop overcharging altogether?
The changes aim to reduce instances of overcharging, but emergency tax may still apply initially. However, automated code updates should improve refund speed.
