Tom Selby, Director of Public Policy at AJ Bell, comments: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket, with the latest official figures revealing over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 Despite this, these figures show too many people are still being overtaxed because of the Revenue’s outdated approach.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.”
Source: AJ Bell analysis of HMRC data
Why are savers overtaxed on pension withdrawals?
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.
This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, landing hard-working savers with shock tax bills often running into thousands of pounds. While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket. It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. If you don’t, you are left relying on the efficiency of HMRC to repay you at the end of the tax year.
How to get your money back if you are overtaxed
If you are taking a steady stream of income via drawdown then you shouldn’t need to take any action, as HMRC will adjust your tax code to ensure that over the course of the year you are taxed the correct amount. However, if you make a single withdrawal then you will either need to fill out one of three forms or rely on HMRC putting you in the correct position at the end of the tax year.
Which form you need to fill out will depend on how you have accessed your retirement pot:
If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z,
If you’ve only flexibly accessed part of your pension pot then use form P55.
Provided you fill out the correct form HMRC says you should receive a refund of any overpaid tax within 30 days.
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