HMRC pays back £57m in overpaid pension tax: are you owed a refund?

New HMRC figures show that thousands of pension savers were refunded £57m in tax between 1 April and 30 June this year. 

Pension savers can withdraw money from their pots after they reach 55 thanks to pension freedoms introduced in 2015, but those who withdraw for the first time are in danger of being charged excessive amounts of tax at an ‘emergency rate’. 

Here, Which? explains why HMRC is overcharging pension tax and how you can claim a refund if you've been affected.

How much has been overpaid?

A total of £56,925,219 was repaid in the second quarter of 2024, according to the latest data from HMRC.  

More than 16,000 reclaim forms were processed during this quarter, with an average reclaim of £3,540 – up by almost £400 compared to quarter one. 

The table below shows the amount of overtaxation since pension freedoms were introduced in 2015. 

This table shows the average reclaim value and how many refunds were processed in each quarter. 

• Find out more: what can I do with my pension savings?

Why are pensions overtaxed?

Those wanting to access their pension pot can do so in two ways. The first is to take an uncrystallised fund pension lump sum (UFPLS). You can take a 25% lump sum of your pension tax-free, and then the rest is charged at your normal income tax rate.

The second is to take a lump sum from a pension drawdown plan. If you do this, 25% of your total pension savings is tax-free and any subsequent withdrawals are subject to income tax.

Your pension company collects the tax on your behalf, so the lump sum you get is paid net of tax. However, many people overpay tax the first time they withdraw from their pension. This is because your provider may not know what your tax code is or details of other income, if you have any.

If your provider doesn't have this information, withdrawals are taxed using a higher-rate emergency tax code, calculated on what's known as a 'Month 1' basis.

This means you'll be taxed as though the lump sum you're withdrawing will be repeated every month. For instance, a £10,000 withdrawal could see you being taxed as though your annual income is £120,000. If this goes unnoticed, it can make an unnecessary dent in your pension pot.

• Find out more: what is a pension drawdown?

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Could you be owed a pension tax refund?

If you are taking a steady stream of income via drawdown, you shouldn’t need to take any action as HMRC should adjust your tax code to ensure you pay the correct amount over the year. 

However, if you make a single withdrawal, it’s important to check you haven’t paid more than you should.

The process is relatively straightforward and can be done online via the government's tax refund website.

How to claim your refund

If you've overpaid tax, you'll need to fill out one of three claims forms:

P55

A P55 form should be used if you haven't withdrawn your entire pension pot and are not taking regular payments.

P53Z

A P53Z form should be completed if you have withdrawn all your pension and also receive other taxable income.

P50Z 

A P50Z form should be completed if you've withdrawn all your pension, but have no other taxable income. 

If you don't want to use the government's online service, you can fill out a form on-screen, print it off and post it to HMRC, or print off and fill in a form by hand. HMRC says you should receive a refund of your overpaid tax within 30 days.

The article was first published on 7 May 2023 and has been updated since to reflect HMRC's latest figures. Last update: 12 August 2024