Older pension savers across the UK may be eligible for significant tax refunds this winter, as many have found themselves overtaxed due to emergency tax codes. From July to September this year, HM Revenue & Customs (HMRC) repaid over £48 million to pension holders, with the average individual receiving around £3,539.
Many over-55s withdrawing lump sums from defined contribution pensions or personal pensions have been taxed at a higher emergency rate, resulting in overpayments that can be reclaimed.
HMRC encourages pensioners to review their tax codes and, where necessary, apply for a refund to ensure they are not left out of pocket.
Emergency tax and pension withdrawals
When individuals access their pension savings for the first time under pension flexibility rules, HMRC often applies an emergency tax code. This is particularly common when a large one-off withdrawal is made.
As a result, savers can be temporarily taxed as if the same sum would be withdrawn each month, leading to considerable overpayments. Pension holders over 55 are usually allowed to withdraw 25% of their pension pot tax-free. Any additional amounts are treated as taxable income.
If the first withdrawal triggers an emergency tax code often recognised by the “M1” or “Month 1” suffix an upfront over-deduction can occur, later correctable through a refund process.
How to check your tax code
Pensioners can find their current tax code through several channels: the HMRC app, the official HMRC website, recent Tax Code Notice letters, or payslips if still employed.
Emergency codes are typically applied if HMRC lacks prior details of the individual’s full annual income profile, which is often the case after an initial pension withdrawal. Financial planners say it is not uncommon for people to be surprised by the size of the deductions, sometimes disrupting planned finances before anticipated purchases or life events.
According to Royal London, some people have recovered in excess of £100,000 due to emergency tax overpayments on pension withdrawals during the last financial year.
Recent HMRC tax code changes
In an effort to simplify pension taxation, from April 2025 HMRC has begun updating tax codes automatically for those newly drawing private pensions.
Announced in the official Pension Schemes Newsletter published in January, the automated system is designed to ensure taxpayers pay the right amount of tax over the course of the year. Affected individuals will be informed via letter or digital communication.
While this simplification is expected to reduce errors, investment managers warn that those who take ad-hoc, single withdrawals may still be at risk of short-term overtaxation. Experts suggest that making an initial, smaller notional withdrawal could ensure future withdrawals are taxed at the appropriate code.
Ongoing challenges for retirees
Despite the reforms, many retirees remain affected by emergency taxation. The PAYE system, primarily developed for regular payroll income, often struggles with the irregularity of pension lump sum withdrawals. Jon Greer, head of retirement policy at Quilter, explained that:
“Although HMRC has made changes to speed up repayments, these figures show the underlying problem persists.” There are growing concerns that as the state pension consumes a larger share of the personal allowance and with the allowance frozen but pensions rising more older people are being pulled into higher tax brackets.
This compounds the likelihood of overpayments when making flexible withdrawals to supplement retirement income.
Claiming pension tax refunds
Those drawing pensions through regular, scheduled payments typically have their tax codes automatically adjusted by HMRC, meaning rare intervention is needed.
However, anyone withdrawing a single lump sum is strongly urged to check if they have accumulated an overpayment. Refunds can be requested online through the government’s tax refund portal. There are three main forms used for claims: P55: For claimants who have not withdrawn their entire pension pot and are not taking regular payments.
P53Z: For individuals who have entirely withdrawn their pension and receive other taxable income. P50Z: For those who have fully withdrawn a pension pot and have no other taxable income.
Final Summary
HMRC’s emergency tax regime and the complexities of pension withdrawals continue to cause difficulties for those accessing retirement funds. Despite recent policy changes intended to reduce errors, a significant number of pensioners still overpay tax and must actively seek refunds.
Financial experts recommend checking tax codes via the HMRC portal and taking advantage of the refund claim system where necessary. The broader situation underscores the importance of careful planning and awareness when managing pension withdrawals in retirement.
For those seeking further clarity on personal tax affairs, resources and support are available through digital platforms such as the Pie app.
