TAXING TIMES
Are you owed £3,000 pension tax refund? Thousands claim cash as new HMRC rules take effect
Scroll down to see how you can claim a refund
PENSION savers are pocketing thousands in tax refunds after being overcharged — and now fresh HMRC changes could stop millions more being stung.
Over 15,000 people got an average refund of £2,881 between January and March this year after being overtaxed when they dipped into their pension pots.
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In total, £44million was handed back in just three months, according to new figures — with hopes the amount overpaid will fall thanks to recent rule tweaks.
HMRC rolled out a new system this month, aimed at stopping retirees from being wrongly whacked with a sky-high emergency tax bill when making a withdrawal.
It ended the long-running issue caused by emergency tax codes applied to pension withdrawals under the pension freedoms introduced in 2015.
For the past decade, anyone over 55 can access their pension flexibly, but HMRC often taxes large withdrawals as if they will be repeated monthly, resulting in overpayments.
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You can start taking cash from a defined contribution (DC) scheme or personal pension when you reach 55.
Usually you can take the first 25% of your pension tax-free, and then anything after that is taxed at the usual income tax rate.
STATE PENSION BASICS
AT the moment the new state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046.
It is a recurring payment from the government most Brits start getting when they reach the state pension age.
However, not everyone gets the same amount, and you are awarded depending on your national insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people's National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn national insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
The full rate of the new state pension is £230.25 a week - or £11,973 a year.
Under the old system, the full basic state pension is £176.45 per week and is paid to those who retired before April 6, 2016.
But people who take large one-off lump sums from these types of pensions are taxed at an "emergency" higher rate of income tax.
Following the change, tax codes will be adjusted faster to reflect accurate earnings, meaning savers will be moved off emergency codes more quickly.
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Jamie Clark, retirement specialist at Quilter, welcomed the changes. He said: “Refunds continued to be a significant issue, with over 15,000 claims in Q1 2025 alone.
“The automation of tax code updates should help — but pension withdrawals are still complex, and mistakes can cost people dearly.”
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He added: “For those accessing pensions during a cost-of-living squeeze, any tax slip-up could derail longer-term plans. Advice is key.”
How to get your cash back
If you've withdrawn a large amount from your pension pot, you need to fill in a form to get your cash back as quickly as possible.
You can wait for HMRC to review your tax code at the end of the tax year and it will process a refund, but obviously, this means you could be waiting a while.
To get the cash back faster, you can fill in one of three forms: a P55, P53Z or a P50Z which can all be found on the Government's website.
Which form you need to fill out will depend on how you have accessed your retirement pot:
- If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z,
- If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z,
- If you’ve only flexibly accessed part of your pension pot then use form P55.
HMRC says it aims to process refunds within 30 days.
To avoid having emergency tax deducted in future, try taking smaller amounts out rather than one lump sum.
More than £1.4billion has now been refunded to savers since 2015 — but thousands are still unaware they’ve overpaid.
From Jan to March 2025 alone, HMRC processed:
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- P55 forms (partial withdrawal): 9,694
- P53Z forms (full withdrawal with other income): 4,409
- P50Z forms (full withdrawal with no other income): 1,171
The next round of HMRC refund figures will be published in July 2025.
What is the personal allowance?
THE personal allowance is the amount you can earn each year tax-free.
In the current tax year - which runs from April 6 2024 to April 5 2025 - the figure is £12,570.
Any earnings above this threshold are taxed at different rates, depending on the income bracket.
However, this amount may be larger if you claim certain allowances, including a blind person's allowance, marriage allowance and child tax credit.
Income tax also applies to money you make outside your job, not just your earnings.
But there are also some tax-free allowances on top of the personal allowance for these other sources of income.
If you are self-employed, you don't have to pay tax on savings interest, dividends and the first £1,000 of income.
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