HMRC repaid £48.7m in tax wrongly taken on pension withdrawals in the second quarter of 2025 — despite introducing new systems to address this problem.
These overpayments related to more than 12,000 withdrawals on pension plans.
These tax overpayments are typically taken when people access their pension flexibly for the first time. Although many people are making a one-off withdrawal from their pension, HMRC systems assume these are monthly withdrawals, and calculate the tax due on this basis. People can apply to get the tax repaid, but need to fill in a special HMRC form.
The HMRC data confirms that these tax rebates were made between 1 April and June 30 this year, and this total sum relates to 12,767 claim forms that were processed during this period – equating to an average of just under £4,000 repaid tax per claim.
This has been an ongoing problem since the introduction of pension freedoms. However HMRC is in the process of improving the tax code system for those accessing pension funds.
Quilter head of retirement policy Jon Greer says: “The latest pension flexibility statistics reveal HMRC is still fighting the scourge of pension tax overpayment despite streamlining the process of providing updated tax codes for people who are new to receiving a private pension, from the current tax year.”
“A total of 12,767 repayment claims were processed in the second quarter of the year, totalling £48,701,927, and around £92m for the year to date.
“For the second quarter, this equates to just under £4,000 per refund, so HMRC’s changes might have resulted in marginally fewer claims but with a higher value compared to the previous quarter, although this was also slightly down on the same period the year before.”
He adds: “The idea behind HMRC’s new tax coding process is that it should reduce the administrative burden on savers, while also minimising the number of overpayments being made in the first place. But the changes they made do not impact the taxation of the first pension payment and although it is early days, and the stats may include payments from the previous tax year, the change appears to be having minimal impact.
“Pension withdrawals are always going to be a challenge for a PAYE system that is designed for regular income. Many people now access their pension for a variety of reasons, be that regular income, gifting, emergencies or one-off payments and each of these could result in emergency tax codes being issued.
“This is a headache for people as the burden is on them to apply for a tax refund.
“This new system will need some time to bed in and hopefully we do start to see the number of claims drop more significantly.”
Broadstone head of policy David Brooks says that the new tax code framework will hopefully improve matters overtime, but could still leave some having to reclaim overpaid tax.
He says: “Improvements to the framework should mean that people accessing their pension cash are moved onto the correct tax code sooner, minimising or eliminating the need to claw back overpayments. While this undoubtedly enhances the system, it leaves a dissatisfactory outcome for those that will still need to reclaim overpaid tax.”