HMRC data revealed earlier this year that over £42 million in pension tax was refunded between January and March 2024.
During the 2023-24 tax year, more than £198 million was reimbursed to taxpayers who had been overtaxed on a pension lum sum, marking a record high.
Individuals aged 55 and above can access their pension funds due to the pension freedoms established in 2015.
For those making an initial pension lump sum withdrawal it’s common to face substantial tax deduction at an ’emergency rate’.
In the final quarter of 2023 it’s reported that more than £38 million in overpaid tax paid was recovered from pension withdrawals.
During this period, over 12,000 pension tax reclaim forms were handled with the average tax rebate reclaimed being £3,216.
Since 2015, nearly £1.2 billion of income tax has been reclaimed by individuals who were overtaxed on their pension withdrawals.
It’s quite likely that similar numbers will be seen in the current 2024/2025 tax year so if you are taking or have already taken a pension lump sum from 6 April 2024 you should find out how to claim your pension tax back in the quickest time possible.
How to claim overpaid pension tax back
If you are receiving a regular income through drawdown, there’s usually no need for any action on your part, as HMRC should amend your tax code to ensure you are taxed correctly throughout the year.
If you make a one-off pension withdrawal and overpaid tax you will either need to complete an HMRC form or depend on HMRC to rectify your tax position by the end of the tax year (6 April 2025).
Completing the relevant HMRC pension tax rebate form should recover your tax in a quicker timescale (normally around 30 working days) and ensures the repayment is made.
- Form P50Z if you have no other taxable income and have withdrawn all of your pension.
- Form P53 if you have taken all of your pension as cash or taken a small pension as a lump sum.
- Form P53Z if you have other taxable income and have withdrawn all of your pension.
- Form P55 if you haven’t withdrawn your pension pot in full and you are not taking regular pension payments.
The pension tax rebate forms can be completed and submitted online or posted to HMRC to the address on the form.
Why are people paying too much tax on pension lump sum payments?
Since 2015, HMRC has opted to tax the first flexible pension withdrawal an individual makes in a tax year on a ‘Month 1’ basis.
This method usually means an emergency rate of tax is applied to pension lump sum payments resulting in unexpected and often substantial tax bills.
While the tax position of those who withdraw regularly or make multiple withdrawals throughout the tax year should in theory (always worth checking) be automatically adjusted by HMRC, anyone making a single withdrawal is likely to be taxed at the emergency tax rate and overpay.
