HMRC Issues Tax Refunds Up to £106,900 to Thousands of Pensioners

A growing number of UK pensioners are receiving significant tax refunds, with many reclaiming more than £10,000 due to overcharged tax on their pension withdrawals.

According to newly released figures, some individuals were reimbursed over £100,000 in a single claim—an eye-opening statistic that underscores ongoing flaws in the current taxation process applied to pensions.

Increase in Refund Claims During 2023/24

Data obtained by Royal London through a Freedom of Information (FOI) request revealed a noticeable rise in tax refund claims made to HM Revenue and Customs (HMRC) during the 2023/24 tax year.

The number of pension savers claiming a refund rose by 20%, from approximately 50,000 in 2022/23 to 60,000 in the latest financial year.

How Pension Withdrawals Are Over-Taxed

The issue stems from the use of an emergency tax code. When individuals over 55 withdraw money from their defined contribution (DC) pension pot, HMRC assumes it’s part of a recurring monthly income. Consequently, a higher tax rate is applied, especially for one-off lump sum withdrawals.

Here’s how pension withdrawals are typically treated:

• 25% of the pension can be withdrawn tax-free
• The remaining 75% is taxed as regular income
• Emergency tax codes often lead to overpayment, requiring manual claims for refunds

Notable Refund Statistics from 2023/24

The FOI data highlights just how significant some of these overpayments were:

HMRC System Changes & Future Tax Concerns

As of April, HMRC introduced a system change aimed at automatically updating tax codes for pensioners who start receiving private pensions. While this is expected to speed up refund processing, experts warn that overcharging may still occur during initial withdrawals.

According to Clare Moffat, a pensions expert at Royal London, the shock of unexpected tax deductions often disrupts financial plans. She notes that the emergency taxing system, although refundable, continues to create confusion and financial stress for retirees.

Future Implications: Inheritance Tax Policy Change

Another driving factor behind larger pension withdrawals is the UK Government’s decision to apply inheritance tax to unused pension pots from 2027. Currently, pensions are exempt from this tax, making them a preferred vehicle for wealth transfer.

However, with the upcoming change, many pensioners are choosing to gift large sums during their lifetime. This trend is likely to result in more one-time withdrawals, potentially increasing the volume of emergency tax deductions and subsequent refund claims.

HMRC’s Response to Refund Concerns

An HMRC spokesperson emphasized that while emergency tax codes may lead to temporary overpayments, “nobody ultimately overpays tax.” Individuals can claim a refund early, and HMRC ensures that all excess payments are reimbursed. Nevertheless, pensioners must often be proactive in filing for these refunds.

The increase in pension tax refund claims highlights ongoing flaws in the emergency tax system used by HMRC. While efforts are being made to improve tax code accuracy and refund efficiency, many pensioners continue to experience unexpected deductions that impact their retirement plans.

With future changes to inheritance tax laws, large lump-sum withdrawals may become even more common, potentially intensifying the issue. It’s crucial for pensioners to stay informed, monitor their withdrawals carefully, and promptly claim refunds when necessary.

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