Pensioners could be owed £4,000 each as HMRC tax refund claims surge past 500,000 - check now

Between April and June 2025, HMRC refunded a total of £48.7 million to pensioners who had been overtaxed when withdrawing their retirement funds. This came from 12,767 claims, with the average refund close to £4,000.

These overpayments happen because HMRC often applies an emergency tax code when someone accesses their pension pot. This can result in far too much tax being taken up front, especially when the withdrawal is a one-off or irregular.

Jon Greer, head of retirement policy at Quilter: "The latest pension flexibility statistics reveal HMRC’s is still fighting the scourge of pension tax overpayment despite a streamlining the process of providing updated tax codes for people who are new to receiving a private pension, from the current tax year.

"For the second quarter, this equates to just under £4,000 per refund, so HMRC’s changes might have resulted in marginally fewer claims but with a higher value compared to the previous quarter."

Despite updates to the system earlier this year to make tax codes more accurate, the latest figures suggest little progress has been made.

The second quarter figures are only slightly down on the same period last year and show that tax errors remain a big issue for those drawing from their pensions.

Steve Webb said: "How longer will all of this go on? Ten years on from the introduction of Pension Freedoms, tens of thousands of people each year are still having to fill in forms to claim back overpaid tax on their pensions from HMRC.

"This is a system designed for the convenience of the tax office, not the taxpayer. Given that most people in retirement pay tax at the basic rate, it would not be difficult to have a system which got things right for most people most of the time, rather than making over-taxing people part of ‘business as usual’.

"It is time to that the whole system was simplified and made more predictable for pension savers looking to draw on their pensions”.

Retirees withdrawing money for reasons such as topping up regular income, helping family, dealing with emergencies or making large one-off purchases are all at risk of being overtaxed.

Because the PAYE system is built for regular salaries, it often struggles to handle flexible pension payments correctly.

Experts say that while HMRC has started to fix the issue by improving tax code updates, the first pension payment is still taxed as if it were regular income. That means many pensioners are still seeing large deductions that they later need to reclaim.

Those affected must submit a claim to HMRC to get their money back. The process can be confusing, and some people may not realise they are owed anything at all.

The specialists warn that anyone planning to dip into their pension should check how it will be taxed in advance. Getting help from a financial adviser or trusted guidance service can help pensioners make smarter, more tax-efficient decisions and avoid losing out.

David Brooks, Head of Policy at independent financial services consultancy Broadstone, acknowledged both progress and limitations in addressing the issue and said: "While HMRC's stats show an alarming £48.7million had to be repaid to pension dippers from tax overpayments in Q2 2025, it is pleasing that the system will soon be changing.

Brooks explained that forthcoming improvements should help pensioners receive appropriate tax codes more quickly, potentially reducing or removing the necessity for overpayment recovery.

"While this undoubtedly enhances the system, it leaves a dissatisfactory outcome for those that will still need to reclaim overpaid tax," he added.

Greer explained that HMRC’s new tax coding process is meant to make things easier for savers by reducing admin and helping to prevent overpayments in the first place.

However, he stressed that the burden still falls on individuals to claim back any tax they have overpaid, calling it "a headache for people".