Pensioners overtaxed £46m on withdrawals – easy tip to avoid ‘shock’ (Image: Getty)
Pensioners have been urged to try one tip to avoid a hefty tax bill when withdrawing from their pension pots. Since 2015, a staggering £1.5 billion has been refunded to pensioners who overpaid tax on flexible pension withdrawals, and in the final quarter of last year alone, HM Revenue and Customs (HMRC) processed £46million in overtaxation claims.
Instead of waiting for a rebate at the end of the financial year or having to fill out a form, finance experts shared one tactic to try and streamline the process. The tip is aimed at pensioners who make one flexible pension withdrawal in one tax year. Under current rules, HMRC taxes 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 savers with shock tax bills often running into thousands of pounds.
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Lots of pensioners will need to complete a form to receive a tax rebate (Image: Getty)
Tom Selby, director of public policy at AJ Bell, said: “As a result of this confusing approach, many are forced to take matters into their own hands to be reunited with their hard-earned money.
Mr Selby slammed HMRC for leaving the system unchanged since 2015 and said there was « no sign of a retreat » in the number of pension overtaxation claims it was processing.
« It is now over a decade since pension freedoms and flexible pension withdrawals were introduced, and HMRC is yet to address one of the enduring flaws in its approach to taxing those who choose to flexibly access their pension pots, » he added.
« But these figures are likely to only barely scratch the surface, as they only capture those who fill in the relevant HMRC reclaim form. In reality, many will be reliant on HMRC putting their affairs in order after the end of the tax year. »
HMRC changed its tax code process in April 2025, so people were moved from an emergency code more quickly.
« But that doesn’t help those taking a one-off withdrawal, who will continue to be overtaxed, » added Mr Selby.
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How to get your money back and avoid getting overtaxed
HMRC should automatically adjust the tax code of people who make multiple withdrawals during the tax year. However, anyone who makes a single withdrawal may need to take action.
You may be able to get your money back within 30 days if you complete one of three HMRC forms. But Mr Selby suggested withdrawing a notional amount instead, to try and avoid huge sums of overtaxation.
“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. »
HMRC forms to claim back money
- 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.
