“Victory in a 10-year campaign to end the scandal of over-taxed pensions” – Steve Webb, LCP

An HMRC system which has over-taxed pensioners to the tune of £1.3 billion since 2015 is finally set to be overhauled following years of campaigning.

When Pension Freedoms were introduced in April 2015, savers with Defined Contribution (‘pot of money’) type pensions were allowed to take their pension out in chunks rather than being forced to buy an income for life. However, HMRC chose to apply ‘emergency tax codes’ to such withdrawals, meaning that people often ended up paying far more tax than needed and then had to claim it back. Since the system was put in place, over 470,000 claims have been made for refunds totalling £1.37 billion. Even in the last three months, nearly £50m was repaid to over 14,000 people.

Now HMRC has announced that it will move much more quickly to replace these ‘emergency’ tax codes with regular tax codes which will make sure that the correct amount of tax is deducted in real time. This should drastically reduce the need either for end-year reconciliations or form-filling to claim back over-paid tax, particularly where people make multiple withdrawals in a single year.

HMRC made the announcement in their latest ‘Pension Schemes Newsletter’, in an article called ‘Helping customers get on the right pension pay faster’, where they say:

“From April 2025, we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset. We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year. There is no need to contact HMRC, and once a tax code has been changed, we’ll inform customers by letter or digitally if they’ve signed up for paperless in the HMRC app or online.”