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\t\t\t<\/p>\n\t\t\tFriday 16 October 2026 5:00 am
\n\t\t\t\t\t\u00a0|\u00a0\u00a0Updated:\u00a0<\/p>\n
\t\t\tFriday 16 October 2026 2:31 pm\n\t<\/p>\n
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Tens of thousands of taxpayers were handed money back from HMRC last year after savers had too much tax deducted from their pension withdrawals, City AM can reveal.<\/p>\n
HMRC processed 54,166 pension withdrawal repayments in the 2025\/26 financial year, worth around \u00a3188m, according to figures obtained through a Freedom of Information request.<\/p>\n
During the financial year, HMRC received 107,880 repayment claim forms. On average, impacted savers were repaid roughly \u00a33,470.<\/p>\n
The overtaxation by the department stemmed from default Pay As You Earn (PAYE) rules used to collect income tax. The PAYE system is the government\u2019s primary method for collecting income tax, national insurance and student loan payments directly from an employee\u2019s wage slip.<\/p>\n
It also deducts taxes from private or workplace pension withdrawals. Under current rules Brits can access their pension pot from age 55, with 25 per cent of the total value of the pot taken tax-free.<\/p>\n
\t\t\t\tSUBSCRIBE HERE<\/a><\/p>\n But in some circumstances, a single withdrawal can be treated as monthly income<\/a>, as pension providers rarely hold an up-to-date tax code for customers, leading HMRC to tax the withdrawal as though it were regular income.<\/p>\n Savers must apply for money back instead of HMRC issuing an automatic refund.<\/p>\n Steve Webb, partner at pensions consultant LCP and former pensions minister, described the need to file a form to recover the money as \u201cabsurd\u201d and an unnecessary burden for the department and taxpayers.<\/p>\n \u201cThe whole system of overtaxing people on pension withdrawals and expecting them to fill in one of three different claim forms to get their tax back is absurd\u2026. a huge waste of taxpayer time and effort,\u201d he said.<\/p>\n \u201cFor most people, the right answer will turn out to be that they need to have basic rate tax deducted at source and that should be what happens. For people who turn out to have been higher rate taxpayers at the end of the year it is a simple matter to collect the rest through the end year assessment process. This system is run purely for the convenience of HMRC rather than the taxpayer and is long overdue for reform.\u201d<\/p>\n \u2018Waste of taxpayer time\u2019<\/p>\n The vast majority of refunded money was claimed through P55 forms, which covers partial withdrawals, with \u00a3124.5m returned across 37,116 claims.<\/p>\n Brits who filled in P53Z forms, used by people who have completely wiped out their retirement pot but can still rely on other income, had \u00a351.8m paid out from 14,372 claims. Meanwhile, an additional \u00a310.8m was refunded across 2,519 P50Z form claims, which<\/a> covers those who have no other existing income.\u00a0<\/p>\n \t\t\t\t\tRead more<\/p>\n \t\t\tHealey urged to \u2018restore faith\u2019 by ending personal allowance freeze in Budget<\/a><\/p>\n Nearly 160 claimants also used niche defined benefit forms in a bid to get money back, including P55DB, P53ZDB and P502DB. In total, savers who filed for a refund using these forms received around \u00a30.85m.<\/p>\n HMRC noted that it works through every case and does not reject claims, but not all applicants receive a payout, with only roughly half of the claims resulting in repayment.<\/p>\n HMRC said: \u201cThis depends entirely on their personal circumstances\u2026whether this is an underpayment for a previous year, if they have ongoing employment, and whether the pension has been taxed at the correct rate of tax.\u201d<\/p>\n Increasing awareness<\/p>\n HMRC\u2019s failure to immediately contact savers who were overtaxed means only those who spot the error and file a claim can attempt to get back their cash immediately.<\/p>\n Others who do not identify the overcharge or choose not to submit a claim, typically have to wait until HMRC runs its end of financial year tax reconciliation process, meaning many often wait months for funds.<\/p>\n HMRC said it could not provide the total number of people whose pension withdrawals had been overtaxed, or the total amount of tax over-deducted, without reviewing individual customer records.<\/p>\n The findings come amid both HMRC and the Department of Work and Pensions (DWP) urging people to become more engaged with their pensions to prevent being overcharged and missing out on other financial benefits.<\/p>\n According to statistics released by the DWP in May, the proportion of overpaid Pension Credit claims increased to 33 per cent in the 2025\/26 tax year, up from 28 per cent the prior year.<\/p>\n