More than £50 million was repaid to pension savers in the second quarter of the year, as HMRC corrected overcharges on flexible withdrawals. This follows £44 million repaid in the first quarter, bringing the total reclaimed since 2015 to over £1.6 billion.
Why Are Pension Savers Overcharged?
Under current rules, an emergency tax code applies to flexible pension withdrawals, leading to higher tax deductions. The system assumes a single withdrawal will be repeated every month of the year, inflating the expected annual income in HMRC's view. For instance, a £10,000 flexible withdrawal could be taxed as if the annual income were £120,000.
Finance experts are urging those who made flexible withdrawals to check Gov.uk for potential overpayments and claim refunds. The average refund amount is around £4,000.
Criticism and Calls for Reform
The system has faced criticism from industry figures who argue the burden of claiming refunds is unfair. Adam Cole, retirement specialist at Quilter, told Sky News: "Retirees are being left out of pocket while they wait for HMRC to return their own money, a process that could and should be quicker or avoided altogether."
HMRC previously stated: "Ultimately, nobody overpays tax as a result of taking advantage of pension flexibility. We will repay anyone who pays too much because they’re on an emergency tax code, and individuals can claim a repayment much earlier if they wish."
How to Claim a Refund
If you have been overcharged, you need to fill out a P55, P53Z, or P50Z form. Use P55 if you have only partly accessed your pension pot flexibly. P53Z is for those who have withdrawn all their pension and receive other taxable income. P50Z applies if you've withdrawn all your pension but have no other taxable income.
Cole added: "PAYE was designed for predictable monthly earnings, not ad hoc pension withdrawals, and as a result, it continues to generate avoidable overpayments that have to be corrected after the fact. All of this is happening at a time when tax pressure on retirees is increasing. With the personal allowance frozen until April 2031 and the state pension taking up a growing share of it, more people are being dragged into tax. When flexible pension withdrawals are then layered on top, emergency tax becomes more likely and more costly. HMRC has improved the speed of repayments, but these figures show the system is still fixing errors rather than preventing them. Until pension taxation better reflects how people actually access their money in retirement, thousands of savers will continue to face unnecessary complexity and cashflow disruption."
