Around 60,000 people claimed back overpaid tax on their pension withdrawals in 2023/24, an increase of 20% on the previous year, new data from HMRC shows.
Of those people, 2,400 received refunds of more than £10,000, while 25 received an average of £106,897, according to the figures, which were obtained by Royal London through a freedom of information request. The average refund was £3,342, a 9% increase on the previous year.
Under UK rules, retirees age 55 and over can flexibly access their defined contribution (DC) pension savings, but their first withdrawal is usually taxed on an emergency tax code under the assumption that they will continue to withdraw that amount every month.
This usually results in overpayment of tax. Retirees can then either wait for HMRC to pay it back at the end of the year, or they have to claim it back themselves.
Clare Moffat, pension expert at Royal London, warned that upcoming changes to UK rules to bring pensions into the scope of inheritance tax could make the situation worse, as more people may make large one-off withdrawals from their pensions to gift to loved ones.
“Looming inheritance tax means more and more people are considering dipping into their pension pots while they are alive for the purpose of making large lifetime gifts to loved ones, which are exempt from inheritance tax if the giver survives for seven-years after making the gift,” she said.
“A rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals. So, the problem of emergency taxes isn’t going away, and there’s a chance it could get worse.”
