HMRC repays £48.7million in overpaid tax as pensioners caught out by 'outdated' system
Thousands of pensioners have been refunded nearly £49million after being taxed too much when accessing their retirement savings. New government data shows HMRC processed 12,767 reclaim forms between April and June 2025.The overpayments were caused by the way pension withdrawals are taxed when taken flexibly. Although changes to the tax coding system were introduced in April, many retirees are still being charged incorrect amounts.Experts have warned that the problem remains widespread and believe the official figures may not reflect the full scale of the issue. Some pensioners may not realise they have overpaid, and others may find the reclaim process confusing.The figures were published in HMRC’s July 2025 pensions schemes newsletter and highlight ongoing concerns about how the tax system handles pension flexibility, ten years after the pension freedom reforms were introduced.Tom Selby, Director of Public Policy at AJ Bell, has condemned the current arrangements as "outdated" and cautioned that the disclosed figures likely represent just "the tip of the iceberg".He pointed out that the statistics fail to capture pensioners who never submit reclaim forms, meaning the true scale of overtaxation could be substantially higher.Whilst acknowledging that modifications introduced in April 2025 have improved the situation for those making regular withdrawals from drawdown arrangements through quicker tax code updates, Selby emphasised that individuals making one-off pension withdrawals remain vulnerable to excessive taxation.Looking ahead, Selby highlighted potential further complications, warning that Government plans to subject pensions to inheritance tax starting in April 2027 will create additional challenges for retirees.The repayments averaged nearly £4,000 per claim during the second quarter, with total refunds reaching approximately £92million for the year so far.Jon Greer, head of retirement policy at Quilter, explained that the PAYE system faces inherent difficulties handling pension withdrawals because it was built for regular income patterns.Greer said: "Many people now access their pension for a variety of reasons, be that regular income, gifting, emergencies or one-off payments and each of these could result in emergency tax codes being issued."The mismatch between the tax system's design and modern pension access patterns means retirees must shoulder the administrative burden of applying for refunds themselves.Financial advisers recommend seeking professional guidance before making pension withdrawals to ensure tax efficiency and calculate precise liabilities.David Brooks, Head of Policy at Broadstone consultancy, described the £48.7million in repayments as "alarming" whilst acknowledging that forthcoming system changes should help address the issue."Improvements to the framework should mean that people accessing their pension cash are moved onto the correct tax code sooner, minimising or eliminating the need to claw back overpayments," Brooks said.However, he expressed dissatisfaction that many pensioners would still need to reclaim overpaid tax despite the improvements.Jon Greer noted that although HMRC's modifications were intended to reduce both administrative burdens and overpayment frequency, the changes do not affect taxation of initial pension payments.He observed that whilst it remains early to assess the full impact, the alterations appear to be having limited effect so far.
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Thousands of pensioners have been refunded nearly £49million after being taxed too much when accessing their retirement savings.
New government data shows HMRC processed 12,767 reclaim forms between April and June 2025.
The overpayments were caused by the way pension withdrawals are taxed when taken flexibly. Although changes to the tax coding system were introduced in April, many retirees are still being charged incorrect amounts.
Experts have warned that the problem remains widespread and believe the official figures may not reflect the full scale of the issue. Some pensioners may not realise they have overpaid, and others may find the reclaim process confusing.
The figures were published in HMRC’s July 2025 pensions schemes newsletter and highlight ongoing concerns about how the tax system handles pension flexibility, ten years after the pension freedom reforms were introduced.
Tom Selby, Director of Public Policy at AJ Bell, has condemned the current arrangements as "outdated" and cautioned that the disclosed figures likely represent just "the tip of the iceberg".
He pointed out that the statistics fail to capture pensioners who never submit reclaim forms, meaning the true scale of overtaxation could be substantially higher.
Whilst acknowledging that modifications introduced in April 2025 have improved the situation for those making regular withdrawals from drawdown arrangements through quicker tax code updates, Selby emphasised that individuals making one-off pension withdrawals remain vulnerable to excessive taxation.
Looking ahead, Selby highlighted potential further complications, warning that Government plans to subject pensions to inheritance tax starting in April 2027 will create additional challenges for retirees.
The repayments averaged nearly £4,000 per claim during the second quarter, with total refunds reaching approximately £92million for the year so far.
Jon Greer, head of retirement policy at Quilter, explained that the PAYE system faces inherent difficulties handling pension withdrawals because it was built for regular income patterns.
Greer said: "Many people now access their pension for a variety of reasons, be that regular income, gifting, emergencies or one-off payments and each of these could result in emergency tax codes being issued."
The mismatch between the tax system's design and modern pension access patterns means retirees must shoulder the administrative burden of applying for refunds themselves.
Financial advisers recommend seeking professional guidance before making pension withdrawals to ensure tax efficiency and calculate precise liabilities.
David Brooks, Head of Policy at Broadstone consultancy, described the £48.7million in repayments as "alarming" whilst acknowledging that forthcoming system changes should help address the issue.
"Improvements to the framework should mean that people accessing their pension cash are moved onto the correct tax code sooner, minimising or eliminating the need to claw back overpayments," Brooks said.
However, he expressed dissatisfaction that many pensioners would still need to reclaim overpaid tax despite the improvements.
Jon Greer noted that although HMRC's modifications were intended to reduce both administrative burdens and overpayment frequency, the changes do not affect taxation of initial pension payments.
He observed that whilst it remains early to assess the full impact, the alterations appear to be having limited effect so far.
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