Brits reclaimed £44 million for overtaxation on pension withdrawals in the first quarter of 2025, according to the latest HMRC figures.
According to the data, over 15,000 reclaim forms were processed during this period, with the average refund amount being £2,881.
More than £1.4 billion has been reclaimed by people who were overtaxed on their pension withdrawals since 2015.
AJ Bell suggests that savers can avoid a large overtaxation bill by making a small initial withdrawal, which helps HMRC apply the correct tax code for subsequent, larger withdrawals. It recommends that savers who have been overtaxed should fill out one of the three HMRC forms to get their tax refund within 30 days.
AJ Bell director of public policy Tom Selby says: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket, with the latest official figures revealing over £1.4 billion 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 Despite this, these figures show too many people are still being overtaxed because of the Revenue’s outdated approach.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.
“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 these people will be moved from an emergency code to paying the right amount of tax more quickly. But that doesn’t help those taking a one-off withdrawal who will continue to be overtaxed.
“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.”
