Thousands of pensioners have claimed back more than £10,000 after being massively overcharged on pension withdrawals. The scale of the problem has shocked experts, with some individuals receiving refunds exceeding £100,000.
Around 60,000 pension savers claimed refunds in the 2023-24 tax year, representing a 20% increase from roughly 50,000 the previous year. About 2,400 pensioners claimed back £10,000 or more, while the top 25 refunds averaged an extraordinary £106,900.
Emergency tax trap
The problem stems from HMRC's "emergency" tax system for pension withdrawals. When someone takes money from their pension pot, the taxman assumes this will be their monthly income for the rest of the tax year, leading to massive overcharging on one-off withdrawals.
The average refund reached £3,342 in 2023-24, up £280 or 9% from the previous year. Since pension freedoms began in 2015, allowing over-55s flexible access to their pension pots, a staggering £1.4 billion has been refunded to overcharged pensioners.
Problem set to worsen
Clare Moffat, pension expert at Royal London, said: "It's incredible to think that some people withdrawing from their pension for the first time were entitled to emergency tax refunds in excess of £100,000. Not only do these taxes usually come as a massive shock, the unexpected tax amount can also scupper people's carefully laid plans."
Government changes to inheritance tax rules from 2027 will make pension pots subject to inheritance tax for the first time. This means more people will likely make large pension withdrawals while alive to avoid the tax hit, potentially worsening the emergency tax problem.
Moffat warned: "A rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals. So, the problem of emergency taxes isn't going away, and there's a chance it could get worse."
System changes promised
HMRC changed its process from April 2025 to automatically update tax codes for people newly receiving private pensions, promising quicker refunds. However, this won't prevent the initial overcharging that catches pensioners off guard.
An HMRC spokesman said: "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."
Sources used: "PA Media", "Manchester Evening News", "Independent", "Evening Standard" Note: This article has been edited with the help of Artificial Intelligence.
