HM Revenue and Customs (HMRC) has reimbursed tens of thousands of pensioners after applying an emergency tax code to their pension withdrawals. Between January and March 2025, more than £44 million was refunded, highlighting ongoing challenges within the tax system linked to pension flexibility.
The issue centres on the use of the ‘month 1’ emergency tax code, automatically applied to one-off pension drawdowns. This often results in excessive taxation, requiring individuals to reclaim the overpaid amounts using official HMRC forms.
Tens of Thousands Affected by Overpayment System
According to HMRC data, £44,003,977 in refunds were issued between 1 January and 31 March 2025. The average repayment per saver stood at £2,881, underscoring the scale of the problem for those accessing their retirement funds under the pension freedoms introduced in 2015.
Over 15,000 repayment forms were processed in the first quarter of 2025, including 9,694 P55 forms for partial pension withdrawals, 4,409 P53Z forms for lump sum payments without other income, and 1,171 P50Z forms for full pension withdrawals with no other income.
According to AJ Bell’s director of public policy, Tom Selby, the official figures are “likely to be only the tip of the iceberg”, as many savers rely on end-of-year adjustments rather than submitting a reclaim form.
Selby criticised the continued use of a “decade-old” system that fails to reflect pension flexibility reforms. “It is simply unacceptable that after all this time the government has still not managed to adapt the tax system,” he said, noting that overtaxation can amount to thousands of pounds and create significant short-term financial pressure.
Calls for Urgent Reform Amid Plans for Tax Code Streamlining
The persistence of this taxation issue has led to calls for HMRC to accelerate planned changes to the tax coding system. According to Jamie Clark, retirement specialist at Quilter, the current process creates an unnecessary administrative burden and risks unintended financial consequences for retirees who make single, unplanned withdrawals.
Clark acknowledged HMRC’s efforts to simplify tax coding, which are expected to take effect in the current tax year. While this may reduce the number of overpayments, he warned that pension withdrawals will continue to pose challenges.
“Many people are still reliant on their pension savings to manage financial pressures, and any hasty decision to access these funds could not only result in unintended, and often unexpected, tax consequences, but they could also hamper longer-term financial plans.” he said.
Despite the recent refunds, many retirees remain unaware of the need to actively reclaim overpaid tax. Without system-wide automation or pre-emptive correction, experts suggest that overpayments will persist, and reliance on HMRC’s annual adjustments may leave many pensioners out of pocket for extended periods.
