Around 60,000 people claimed back overpaid pension tax in 2023-24, an increase of 20 per cent on the previous year

Tens of thousands of retirees received refunds averaging £3,342 last year after being overtaxed on their pension withdrawals, new figures show.

Around 60,000 people claimed back overpaid pension tax in 2023-24, an increase of 20 per cent on the previous year, according to data from HMRC, obtained via a Freedom of Information request by Royal London.

Of those, around 2,400 people claimed back more than £10,000 in tax, while the top 25 refunds averaged £106,897 each.

Over half a million people have been forced to claim back overpaid tax on their pensions since 2015, with the total amount refunded approaching £1.5bn.

Pension freedoms, introduced in 2015, allow people aged 55 and over to withdraw some or all of their defined contribution (DC) pensions – where you save up a pot of money for retirement – as a lump sum.

You can take the first 25 per cent of your DC pension tax-free, up to a maximum of £268,275, and the rest is taxed as income.

But under these rules, when people first access a DC pension, an “emergency” tax code is usually applied which treats the first withdrawal as if the same amount will continue to be taken every month.

This often results in pensioners paying significantly more tax than they need to.

For example, if you withdrew a taxable lump sum of £20,000, you would be taxed as if you were taking 12 times this amount – £240,000 – during that tax year.

At the end of the tax year, HMRC will return any overpaid tax via its annual reconciliation process, but anyone wanting their money sooner must manually claim it back.

This system has faced repeated criticisms from the pensions industry, but while HMRC is currently overhauling its tax code system to make refunds faster, the system of being overcharged up front has not changed.

Clare Moffat, pension expert at Royal London, said tax overpayments “usually come as a massive shock” to retirees and the delay in getting the money back can “scupper people’s carefully-laid plans”.

“Suddenly, that large chunk of money which had been earmarked for something special, like a new kitchen or the holiday of a lifetime, has shrunk considerably, and in some cases these plans may have to be postponed or abandoned altogether,” she said.

“HMRC recently announced an overhaul of its emergency tax codes on pensions, which it promises will deliver quicker refunds, but that doesn’t mean people won’t still be charged the higher rate in the first place.”

Moffat said that those affected tend to be people who take out a significant lump sum that is worth more than their 25 per cent of their whole pension.

“The temptation is to make your first withdrawal a big one to splash out a little after years of careful saving, but unfortunately, that’s exactly how you end up paying a large chunk of your life savings in emergency tax,” she explained.

“One way people can avoid emergency taxes when taking money out of their pensions is by making a small initial withdrawal which will have the effect of triggering a less punitive tax code on future withdrawals.”

How do I know whether I can claim tax back?

If you have accessed your pension savings for the first time this year and have saved into a DC pension, you may be owed overpaid tax.

This is most likely if you took out a large, one-off lump sum of money that is worth more than 25 per cent of your total pension savings.

Another sign you have overpaid is if an emergency tax code was applied to your withdrawal.

A sign to look for is “M1” at the end of your tax code in any paperwork about your pension withdrawal. This means you were taxed on a “month one” basis, which assumes you will take the same amount every month.

You may simply notice that you have paid more tax than you were expecting. If this is the case, it is worth checking with your pension provider how you were taxed.

Standard Life has a calculator you can use to help work out whether you may have overpaid tax.

If you think you have been overtaxed, you need to complete one of three forms from HMRC. You can make an online claim or download a paper form to fill in here.

A spokesperson for HMRC said: “We will repay anyone who pays too much because they’re on an emergency tax code and individuals can claim a repayment much earlier if they wish.”