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A massive £44m of overpaid pension tax was repaid to pension savers between January and March 2025, so if you’ve made a flexible withdrawal from your pension savings, it’s worth checking to see whether you might have paid too much.
When you start to access your pension savings, you usually take 25% of these savings tax-free. Any other money you take from your pension plan will be treated like other income and will be subject to tax.
However, due to an oddity within the Pay As You Earn (PAYE) system, anyone taking money flexibly out of their defined contribution pension is placed on an emergency tax code by HMRC when they make a withdrawal. This essentially means that you usually don’t receive any tax-free personal allowance, meaning you will pay too much income tax until you can be put on the correct tax code.
More than £1.4 billion has now been reclaimed by people overtaxed on pension withdrawals since 2015. Over 15,000 repayment claims were processed between January and March 2025 alone, with an average refund of £2,881 per person.
HMRC is now streamlining tax coding to reduce the administrative burden on savers and minimise overpayments.
Here, we explain why the incorrect amount of tax is being charged on pension income, steps you can take to prevent this from happening, and how you go about claiming back any overpaid tax you’re owed.
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Why have I been charged too much tax on my pension?
Since pension freedom rules were introduced a decade ago, HMRC has taxed the first flexible withdrawal someone makes in a tax year on what’s known as a ‘Month 1’ basis.
This assumes that the same amount will be withdrawn from the pension each month, when most people take a variable income from their pot. Read more in our article What is pension drawdown and how does it work?
Tom Selby, director of public policy at AJ Bell, explained: “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.”
Is there anything I can do to prevent HMRC overcharging tax on my pension withdrawals?
Hopefully, the changes HMRC is implementing will help prevent pension savers over-paying tax in future, as tax codes will be adjusted to ensure that they are taxed the correct amount.
If you’re still concerned about being overcharged, you can reduce the risk of making a significant tax overpayment by only taking a small amount from your pension initially, rather than a large lump sum.
John Chew, pension, tax and estate planning specialist at Canada Life, said: “While we wait for the tax system to catch up with the freedoms, a good tip for people who are making a pension withdrawal for the first time is to request a small withdrawal of say £100. That will generate a tax code from HMRC, which the pension provider will apply to any subsequent withdrawals.
“That will result in the tax being taken at source being far more accurate in many more cases, not only reducing the burden of paperwork but equally importantly the customer receiving a more accurate withdrawal in the first place. It’s also worth noting that any change in tax position during the course of the year, resulting in a new tax code being issued by HMRC, should also be shared with your pension provider as a matter of course. This will help identify any differences in the tax being applied and allow for earlier intervention if required.”
How can I get my overpaid pension tax back?
If you think you’ve paid more tax than you needed to, but you’re taking a steady stream of income from your pension 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.
But if you’ve made just one withdrawal, you’ll need to fill out one of three HMRC forms and you should get your money back within 30 days.
The type of form you’ll need to fill out will depend on how you’ve chosen to access your retirement pot:
- If you withdrew all your pension savings and received no other taxable income that tax year, use form P50Z
- If you withdrew all your pension savings but had other taxable income that tax year, use form P53Z
- You’ve withdrawn some cash from your pension, but not all of it; you should use form P55
You won’t have overpaid tax if you’ve withdrawn 25% or less of your pension, which is the tax-free amount you can take from the age of 55 (rising to 57 from 2028). You can find out more about the rules in our article How much tax will I pay when I withdraw my pension?
Working out how much tax you should be paying on your pension income can be complicated.
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
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