New figures published by HMRC reveal that the total number of claims for overpaid tax on pension withdrawals has soared above half a million to 502,000 to total almost £1.5bn reclaimed since the introduction of Pension Freedoms in 2015.
Brits reclaimed £49m in overtaxation on pension withdrawals in April, May and June this year.
Nearly 13,000 reclaim forms were processed during the quarter, with an average reclaim of £3,815, the figures show.
The problem arises when people first take money out of a DC pension and are often taxed on the basis of an ‘emergency’ tax code, which effectively assumes that they will make large numbers of withdrawals in the rest of the tax year. In many cases it results in more tax being withdrawn from the pension payment than is necessary.
LCP partner and former pensions minister Steve Webb said it’s time for reform. He said: “How longer will all of this go on? This is a system designed for the convenience of the tax office, not the taxpayer.
“Given that most people in retirement pay tax at the basic rate, it would not be difficult to have a system which got things right for most people most of the time, rather than making over-taxing people part of business as usual.
“It is time to that the whole system was simplified and made more predictable for pension savers looking to draw on their pensions.”
Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket.
“The latest figures are likely to be only the tip of the iceberg, however, 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 at the end of the tax year.”
He said HMRC has offered some respite to those who take a regular drawdown income. “From April 2025, the government improved its tax code process so people are moved from an emergency code to paying the right amount of tax more quickly. But that doesn’t help those taking a one-off withdrawal who will continue to be overtaxed.”