Thousands of people were forced to claw back overcharged tax totalling £44mn on withdrawals from their pension in the first three months of 2026, new figures from HM Revenue & Customs (HMRC) show. The scale of the problem has been mounting for years, and almost £1.6bn has now been reclaimed since 2015, according to AJ Bell.
That was the year in which HMRC introduced new rules allowing those over the age of 55 to withdraw money from their defined-contribution (DC) pension pots – either all in one go or in smaller chunks. However, one design flaw persists 11 years on.
The flaw is built into the way pension withdrawals are taxed. HMRC taxes the first flexible withdrawal someone makes in a tax year through the Pay As You Earn (PAYE) system on a ‘month 1 (M1)’ basis, which is an emergency tax code. As such, HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, meaning you are paying an emergency tax rate on it.
The nature of PAYE taxation means it affects those who make a single withdrawal from a pension after they have taken their tax-free lump sum, rather than those who draw a steady income from their pension or make multiple withdrawals a year.
While over-taxation is a temporary problem, it can still come as a shock. The number of repayment claims this year has fallen by 9.6 per cent since the first three months of 2025, but the average repayment by HMRC has risen by 9.9 per cent to £3,166, figures show. Adam Cole, a retirement specialist at Quilter, says: “Fewer people may be caught by emergency tax, but when it happens the sums involved are larger, leaving retirees out of pocket while they wait for HMRC to return their own money.”
At a time when retirees, like everyone else, are being squeezed for more tax, larger overpayments become something of an inevitability. With the £12,570 personal allowance frozen until April 2031 and the triple-locked state pension nudging ever closer to this, a greater portion of DC pension pot withdrawals are likely to be taxed. Pensions being brought within the scope of inheritance tax doesn’t help either, as it is likely to see more people drawing income to shrink the size of their estate.
There are ways to minimise the issue. If you withdraw a steady stream of income from a pension, HMRC should adjust your tax code to ensure that over the course of the year you are taxed the correct amount. If you want to make a single withdrawal from your pension in a tax year and don’t want to risk being overtaxed, you can make a small notional withdrawal first. This should allow HMRC to apply the right tax code to a second, larger withdrawal.
You can also fill in one of three HMRC forms to claim back tax on a single withdrawal – P55, P53Z and P50Z. Which form you need to fill in depends on how much of your pension pot you’ve emptied and whether you are still working or receiving benefits. You should receive the money you overpaid back within 30 days. Otherwise, HMRC will put you back in the correct tax position at the end of the tax year.
