9 hours Ago By Samantha Downes
HMRC is committed to improving how tax code information is used after thousands of pensioners ended up having their retirement funds subject to emergency tax when they were basic rate taxpayers. Currently, pension withdrawals are taxed using a temporary emergency code, which means thousands of retired savers end up paying 40% instead of 20% tax. Pensioners have to claim back the difference using a tax return , but this system is currently being overhauled, with changes starting to take effect in the current financial year.
HMRC said that in the first three months of 2025, 15,274 repayment claims were processed, with £44,003,977 repaid; this equates to just under £3,000 each. An emergency tax code means the entire withdrawal of cash is taxed at either 20% or 40%, rather than allowing for a personal tax-free allowance or any tax-free cash allowance. At least £1 billion has been reclaimed by people who were overtaxed after taking money out of their pensions.
The issue dates back to pension freedoms introduced in 2015. These changes meant retirees could access their pension savings at 55, but taking cash out of a pension means it is subject to tax. The most common tax code for tax year 2025 to 2026 is 1257L, according to HMRC .
It's used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example, a company car). 1257L is an emergency tax code only if followed by 'W1', 'M1' or 'X'. Jamie Clark, retirement specialist at Quilter, said: “The latest pension flexibility statistics reveal HMRC ’s plans to streamline tax coding from the current tax year couldn’t come soon enough.
" "Pension tax overpayment refunds continued to be a significant issue in the first quarter of 2025, with 15,274 repayment claims processed between January and March 2025, amounting to £44,003,977. This equates to a little under £3,000 per refund. “ HMRC ’s new tax coding process should not only reduce the administrative burden on savers, but with hope it will also minimise the number of overpayments being made in the first place.
Nonetheless, pension withdrawals will remain a challenge. "Many people are still reliant on their pension savings to manage financial pressures, and any hasty decision to access these funds could not only result in unintended – and often unexpected – tax consequences, but they could also hamper longer term financial plans. “The PAYE system, while serving its purpose for regular income, has often applied emergency tax codes to one-off withdrawals, resulting in a large number of overpayments.
The automation of tax code updates for new pension recipients should help alleviate this issue, but time will tell just how much of an impact it has. “If you are considering accessing your pension, seeking professional financial advice will be key. Financial advisers can ensure you are making any withdrawals in the most tax-efficient way possible, and will also help make sure you remain on track to reach any long-term goals.
“With hope, we will see the number of repayment claim forms being processed fall from here on out, thanks to HMRC ’s efforts to improve the system, but there is still a long way to go to ensure it works seamlessly. In the meantime, it is likely that some retirees will still face significant overpayments and subsequently the often arduous task of reclaiming their money.”.
