HM Revenue and Customs figures show a total of £1.2 billion has been refunded in overpaid pension tax since pension freedoms were introduced
More than half a million pensioners have been stung by hefty tax bills when accessing their pension funds – with some overcharged by thousands of pounds. Data published by HM Revenue and Customs shows that £48.7 million in excess pension tax was returned in the past three months alone, spanning April to June 2025.
Since pension freedoms launched in 2015, savers have been incorrectly taxed by £1.2 billion, impacting at least 574,000 people who tapped into their pensions flexibly. The blunder arises from how HMRC implements emergency tax codes when pension funds are first accessed.
Rather than taxing solely the withdrawn amount, HMRC presumes the identical sum will be extracted monthly – leading to harsh deductions. Activists and specialists have condemned the situation as a “disgrace” and are calling for immediate reform.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “These people have done the right thing, saved hard for their retirement only to be caught up in a tax mess that takes months to unwind.”
She added: “The system of emergency tax leaves thousands of people out of pocket every year and reliant on a repayment system that can take months to sort out. People can reclaim the money via a form, but many don’t realise this and have to wait until they receive a rebate through their tax return.”
The typical refund in the last quarter was approximately £3,200 per person, indicating some pensioners could have been overcharged significantly more – particularly if they withdrew larger one-off lump sums. Under pension freedom rules brought in a decade ago, over-55s can access money from their defined contribution pensions as they choose.
However, unless a pension provider can use a proper tax code, HMRC generally applies an emergency one – taxing the withdrawal as though it is the first of 12 monthly payments. Steve Webb, a former pensions minister and partner at LCP, said: “It remains a disgrace that HMRC continues to overtax hundreds of thousands of people every year and expects them to fill in forms to get their money back.”
A spokesperson for HMRC said: “Nobody overpays tax as a result of taking advantage of pension flexibility. People can claim any overpaid tax back from HMRC. We aim to process these repayments within 30 days.”
However, critics contend the system should not depend on retirees to chase refunds at all – especially at a time when many are struggling with soaring bills.
Helen Morrissey cautioned that the situation could worsen further in the coming months as more people dip into their pensions to cover the cost of living. She said: “With pressure on people’s finances many may turn to their pension for help and risk being taxed too much at a time when they can least afford it.”
These revelations will likely intensify demands for a revamp of the system to ensure savers are taxed correctly at the first instance, rather than having to wade through a complex bureaucracy just to reclaim their own money.
