Thousands of pensioners reclaim over £10,000 due to excessive tax charges on withdrawals

Fresh analysis has uncovered that thousands of pensioners have successfully reclaimed over £10,000 each after being excessively taxed on their pension withdrawals. As well as this, a select few individuals across the UK have managed to secure refunds in excess of an astonishing £100,000.

Royal London, through a freedom of information (FOI) request, obtained data from HMRC showing a significant increase in the number of refunds claimed during the 2023-24 tax year. The pension freedoms introduced in 2015 allow those aged over 55 various options for accessing their defined contribution (DC) pension savings. Under normal circumstances, individuals can withdraw up to 25% of their pension pot tax-free, while the remaining 75% is subject to income tax.

However, an "emergency" tax rate is often applied to pension withdrawals, with HMRC treating the withdrawal as if it were the individual's monthly income for the rest of the tax year. This has led to instances of overcharging for those making one-off withdrawals.

In the 2023-24 tax year, around 60,000 pension savers received refunds, marking a 20% rise from the approximately 50,000 who did so the previous year, according to Royal London's statistics. Of these, about 11,700 pensioners claimed back £5,000 or more, with 2,400 among them getting refunds of over £10,000.

The average refund amount was £3,342, which is £280 or 9% higher than in the 2022-23 tax year. The highest 25 refunds averaged £106,900, the data showed. Clare Moffat, pension expert at Royal London, said: "It's incredible to think that some people withdrawing from their pension for the first time were entitled to emergency tax refunds in excess of £100,000.

"Not only do these taxes usually come as a massive shock, the unexpected tax amount can also scupper people's carefully laid plans. HMRC recently announced an overhaul of its emergency taxing 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."

From April, HMRC has revised its approach so that tax codes are automatically updated when individuals start drawing from a private pension. Ms Moffat pointed out that with the Government planning to subject unused pension funds to inheritance tax from 2027, "more and more people are considering dipping into their pension pots while they are alive" to give significant lifetime gifts to family members.

Currently, pensions are not subject to inheritance tax, making them an efficient way to pass on wealth. "A rise in large lump-sum withdrawals will likely mean an even greater spike in emergency taxes on those withdrawals," she said, adding: "So, the problem of emergency taxes isn't going away, and there's a chance it could get worse."

The figures revealed that about £1.4 billion has been refunded since 2015. A spokesperson for HMRC stated: "Ultimately, nobody overpays tax as a result of taking advantage of pension flexibility.

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."