Picture this: you’re ready to use the money you’ve saved for years, but you end up paying more taxes than necessary. This happens to many retirees in the UK when they withdraw from their pensions. Fortunately, there’s an easy way to avoid this: the £1 pension trick.
In this guide, we’ll explain how the £1 pension withdrawal works, why HMRC overcharges, and how to reclaim any extra taxes you’ve paid. We’ll also show how our payroll and pension services in London can help individuals and businesses manage pensions effectively.
What Is the £1 Pension Trick?
The £1 pension trick is a simple way to avoid being overtaxed when you take money from your pension. It involves making a small initial withdrawal of just £1 from your pension pot before you make a larger withdrawal. This small step tells HMRC that you’re accessing your pension, so they apply the proper tax code to future withdrawals.
This prevents the emergency tax from kicking in under the Month 1 tax code. This system divides your personal allowance by 12 and treats your initial withdrawal as the start of monthly payments, leading to higher taxes. For example, if you withdraw £10,000, HMRC might think you’ll earn £120,000 that year, resulting in a large tax withholding.
By making that initial £1 withdrawal, you inform the system that your next withdrawal isn’t part of regular income, ensuring you get taxed correctly moving forward.
Why HMRC Overtaxes Pension Withdrawals
Since the 2015 Pension Freedoms legislation, retirees over 55 can access their pension savings more easily. However, this flexibility has created confusion. HMRC’s tax system was made for regular jobs, but it doesn’t fit well with one-time pension withdrawals.
The Month 1 tax code treats your withdrawal as if it’s just the first of many monthly payments, assuming a full year’s income. This often means you are taxed as if you are taking out much more than you are. HMRC does this to prevent under-taxation, but it leaves retirees in a tough financial spot.
The result? Many people end up overpaying taxes and face long waits for refunds unless they know how to reclaim their money.
Real Numbers Behind the Problem
From July to September 2025, HMRC refunded almost £50 million in overpaid taxes from pension withdrawals. Over 13,700 people submitted reclaim forms and got an average refund of £3,539. This shows a worrying trend: many pensioners are unaware of the situation.
Since pension withdrawal tax changes began, HMRC has refunded over £1.5 billion in total. These are not just one-time mistakes but consistent errors due to old ideas in HMRC’s tax coding. Sadly, the people most affected are often older adults managing retirement income for the first time.
If you’re planning a withdrawal and don’t know about the £1 pension trick, you might be the next to overpay by thousands.
How the £1 Pension Withdrawal Move Works
Let’s see how this works in real life. Suppose you want to withdraw £20,000 from your pension. Normally, your provider tells HMRC, which uses the Month 1 emergency tax code. This could mean up to £6,000 in tax, even if you qualify for a lower rate.
Instead, you can make a small initial withdrawal of £1. This alerts HMRC that you are starting to withdraw from your pension and updates your file. When you make the larger withdrawal later, it’s taxed at the correct rate, saving you a lot of money.
This method also helps retirees who may not get a regular income. It shows that this is a one-time or irregular withdrawal, preventing the system from making wrong assumptions about your situation.
How to Avoid Emergency Tax on Pension Withdrawals
Avoiding extra tax deductions is easy if you follow these steps:
- Make a small withdrawal from your pension (at least £1).
- Wait for HMRC to process this transaction.
- Once your tax code updates, make your main withdrawal.
This method allows you to withdraw your pension without high tax and avoids long waits for refunds. It’s useful for people needing quick access to cash for urgent expenses, healthcare, or home repairs.
Remember, you have the right to do this even if your provider or adviser doesn’t mention it.
How to Reclaim Overpaid Pension Tax from HMRC
If you’ve withdrawn money without using the trick, don’t worry. HMRC offers three forms to help you get your money back, based on your situation:
- P55: For partial withdrawals when you still have some money left.
- P50Z: For full withdrawals if you’re not working.
- P53Z: For full withdrawals if you have other sources of income.
Filling out the correct HMRC P55 form can help you get a tax refund quickly, often within weeks. You can download these forms from the HMRC website or submit them online with your Government Gateway account.
Remember: If you don’t act, you might have to wait until the end of the tax year for a correction. This delay can mean missing out on money for months due to paperwork.
Why This Issue Still Exists in 2025
You might wonder why this problem isn’t fixed. The reason is outdated systems. HMRC still uses old tax codes that don’t fit today’s pension needs.
Even after a decade of pension freedom rules, many people struggle because they are unaware of these issues, and no reforms have been made. The current system puts the responsibility on retirees to fix problems instead of preventing them.
At Clarkwell & Co., we keep track of these changes so our clients don’t have to. Whether through our pension enrolment services or our outsourced payroll service, we help you avoid expensive mistakes.
How Employers Can Help Their Staff Avoid the Trap
For small businesses, retirement support is more than a nice gesture; it’s an investment in employee wellbeing. Teaching staff how to avoid emergency taxes during pension withdrawals shows you care about their financial futures.
Workshops, newsletters, or meetings with an accountant can be very helpful. Using a provider like Clarkwell & Co. can automate payroll and pension enrolment, ensuring compliance and giving staff confidence in their pensions.
As pension contributions become standard benefits, helping staff learn how and when to access their money is the next step in responsible business practise.
Final Tips to Stop HMRC Emergency Tax on Pension
Let’s summarise your action plan:
- Start with a £1 test withdrawal to inform HMRC.
- Wait for the tax code update before making the large withdrawal.
- If taxed incorrectly, file a P55, P50Z, or P53Z reclaim form.
- Get professional help if you’re unsure which path suits you.
Your pension is your money and your future. Don’t let red tape reduce your retirement income. With help from experts like Clarkwell & Co., you can make clear and confident decisions.
A Pound That Protects Your Pension
The £1 pension trick can save you thousands. With money being tight, it’s crucial to know how pension withdrawal tax works in the UK.
You’ve put in a lot of effort to save. Don’t lose money over a small detail. Take charge, get advice, and plan smartly. If you need help or someone to handle it for you, contact our friendly team at Clarkwell & Co. Chartered Certified Accountants.
