UK pensioners are getting good news: HMRC is returning millions in overpaid Tax on pension withdrawals. If you recently took money from your pension and saw a big tax deduction, you might get a refund. From April to June 2025, nearly 13,000 people claimed an average refund of £3,800 each, totalling over £48.7 million for that period. By mid-year, the total refunds reached almost £92 million.
So, what went wrong? HMRC’s method of taxing pensions during withdrawals is often incorrect. If you made a large withdrawal, you likely paid too much Tax. Many retirees who relied on their pensions for basic needs found themselves overpaying, adding financial pressure during retirement.
Understanding the ‘Month One’ Tax Code Trap
The main issue is the HMRC’s month one tax code. When someone starts taking money from a private pension, HMRC often uses an emergency code. This code treats the first withdrawal as a regular monthly income. As a result, a large lump sum can be taxed like a regular payment, leading to too much Tax being taken. The emergency code only counts one-twelfth of your annual tax-free allowance, ignoring the rest until your tax code is fixed.
This causes what experts call a UK pension tax overpayment, especially for people accessing flexible pensions for the first time. Although this mistake might get corrected at the end of the tax year, many pensioners lose money for months. For those with little savings or urgent financial needs, this delay can be very stressful.
Real Stories: How Tax Mistakes Hurt Retirees
Imagine taking out £20,000 from your pension for the year, only to discover that HMRC thinks you’ll get that amount every month. They view it as a monthly income of £20,000, which affects your tax code. As a result, you might be taxed as if your annual income is over £200,000.
At Clarkwell & Co., we often meet pensioners confused about their high tax bills. After reviewing their statements, we find they are eligible for a tax refund on their lump sum pension. These cases show how important it is to seek advice before making large withdrawals. In some instances, clients have recovered over £5,000 in wrongly paid taxes just by submitting the correct forms.
How to Claim a Pension Tax Refund Quickly
If you’ve paid too much Tax, don’t worry. You can easily get it back by following these steps. You can claim a pension tax refund in the UK using one of three HMRC forms based on your situation:
- P55 form: Use this if you still have money in your pension and plan to take money out later.
- P53Z form: Choose this for lump sum withdrawals when your pension is empty and you have other taxable income.
- P50Z form: Use this if you’ve taken all your pension, stopped working, and have no other income.
You can find all the pension tax refund forms on the Gov.uk website. You can apply online or send the form by mail to HMRC. This is your first step to getting your money back. Many people receive their refunds within 30 working days, but complicated cases might take longer.
Tips to Avoid Pension Tax Overpayment
To avoid paying too much Tax on your pension, start by withdrawing a small amount. This helps HMRC use the right tax code based on your yearly income and prevents emergency tax calculations.
You can also get personalised advice on pension withdrawals. At Clarkwell & Co., we offer support to help retirees plan their withdrawals and avoid extra tax deductions. Knowing your tax code and pension strategy can save you a lot of money over time.
We also suggest reviewing your taxes at the end of the year to see if you’ve overpaid, especially if your income changes monthly. Staying alert can help you catch HMRC mistakes.
Tax Code Errors: A Common but Fixable Problem
Pension tax code errors happen often. With more people accessing their pensions flexibly, HMRC’s systems can struggle to keep up with changing income patterns. If your tax code starts with 1257L and has a “W1” or “M1” suffix, you are likely on an emergency tax basis. These codes mean the system is treating each month separately.
These errors are common for first-time pension withdrawals. That’s why many people use our payroll services to ensure their tax codes are updated correctly and communication with HMRC is quick. As a trusted UK payroll provider, we act fast to avoid long-term errors and extra tax bills.
Don’t assume your tax code is correct. Always check your payslip or pension statement, and consult a professional if something seems wrong.
Your Rights: How HMRC Taxes Pensions Explained
It’s important to understand how HMRC taxes pensions so you can plan effectively. When you withdraw from your pension, it’s treated as income and taxed under the PAYE system. For the 2025/26 tax year, you have a personal allowance of £12,570. Any amount over this is taxed at your marginal rate (20%, 40%, or 45%). Extra income, like interest or rental profits, can unexpectedly push you into a higher tax bracket.
If you’re unsure about your tax situation, a tax advisor can help you estimate your Tax before you make withdrawals. This way, you won’t have to rely only on HMRC’s estimates. At Clarkwell & Co., we offer proactive tax planning sessions for pensioners and retirees.
Understanding pension tax is also important for inheritance planning and managing your estate. This knowledge helps families preserve their wealth.
When to Act: Don’t Wait for the End of Tax Year
You don’t have to wait until April 2026 for your refund. You can quickly get your pension tax refund by submitting the correct form as soon as you notice an error in your tax return. Most refunds are processed within 30 days, so acting fast is important.
Delays can cause money problems, especially for pensioners with fixed incomes. If you think you’ve been taxed incorrectly, talk to an accountant right away. Clarkwell & Co. can check if you qualify for an HMRC refund for pensioners and help you with the claims process.
We can also assist if you received a letter from HMRC asking for repayment or if you are being reviewed in a tax investigation. Taking action early is crucial for resolving these issues quickly.
Why Professional Help Makes a Difference
HMRC has a tool for claiming refunds, but it can be confusing, especially for those unfamiliar with online forms. Professional help can save you time and reduce stress. At Clarkwell & Co., we assist with refunds and offer additional services like HMRC tax investigations and UK payroll support.
We quickly identify any signs of an HMRC tax investigation. We also ensure your pension withdrawals are tax-efficient and follow the current rules. Our team helps clients appeal decisions, respond to letters, and complete all paperwork accurately and on time.
Don’t Let HMRC Keep Your Money
If you’ve taken money from your pension and received a high tax bill, act now. This year, nearly £49 million has been refunded, and you might get thousands back. Use the correct forms for a pension tax refund, get advice, and steer clear of the emergency tax code for pensions. Stay informed and take charge to protect your retirement income.
To explore our support for pensioners and those dealing with HMRC, check out our:
Clarkwell & Co. Chartered Certified Accountants can help you get what you deserve quickly and confidently.
