HM Revenue and Customs (HMRC) has processed more than 15,000 pension tax refund claims in the first quarter of 2025, with pensioners receiving back nearly £3,000 each on average.
Between January and March, the tax authority handled 15,274 repayment claims from retirees who had been overtaxed on their pension withdrawals.
The total amount refunded during this period reached just over £44million, highlighting the scale of the ongoing issue.
Many pensioners continue to face emergency tax codes when accessing their retirement funds, resulting in them paying more tax than necessary.
Pensioners are reminded to check if they can claim a pension tax refund worth nearly £3,000GETTY The issue stems from pension withdrawals being taxed using temporary emergency codes, which often results in basic rate taxpayers paying 40 per cent instead of their correct 20 per cent rate.
An emergency tax code is applied when the entire cash withdrawal is taxed at either 20 per cent or 40 per cent, without considering personal tax-free allowances.
According to HMRC, the most common tax code for the 2025-2026 tax year is 1257L. This becomes an emergency tax code only when followed by ‘W1’, ‘M1’ or ‘X’.
The problem can be traced back to the pension freedoms introduced in 2015, which allowed retirees to access their pension savings from age 55.
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People who were overtaxed after withdrawing money from their pensions have reclaimed at least £1billion to date.
The current system requires pensioners to claim back the difference via a tax return, creating an administrative burden for retirees.
Jamie Clark, a retirement specialist at Quilter, commented: “The latest pension flexibility statistics reveal HMRC’s plans to streamline tax coding from the current tax year couldn’t come soon enough.
“Pension tax overpayment refunds continued to be a significant issue in the first quarter of 2025, with 15,274 repayment claims processed between January and March 2025, amounting to £44,003,977.
“HMRC’s new tax coding process should not only reduce the administrative burden on savers, but hopefully it will also minimise the number of overpayments being made in the first place.
“The PAYE system, while serving its purpose for regular income, has often applied emergency tax codes to one-off withdrawals.”
This has resulted in a large number of overpayments that pensioners must then reclaim. HMRC is now working to automate tax code updates for new pension recipients, which should help alleviate this issue.
Those who have been overtaxed can reclaim their money by filling out one of three HMRC forms. The tax authority promises that those who submit the correct form should receive their refund within 30 days.
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Without this action, HMRC says it will correct tax positions at the end of the tax year. Tom Selby, director of public policy at AJ Bell, criticised HMRC’s approach,
He said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket.”
“Over £1.4billion has now been repaid to people who were overtaxed on their first withdrawal and filled out the relevant HMRC form.”
Selby warned these figures are “likely to be only the tip of the iceberg” as they only capture those who complete the specific reclaim forms.
“It is simply unacceptable that after all this time the Government has still not managed to adapt the tax system,” Selby added.
