HMRC refunds overtaxed savers over pension withdrawals

Summarised from BristolLive's report · Updated 17 Oct, 19:44 · Archive

HMRC refunded around £3,470 each to 54,166 savers in 2025/26 after collecting excess tax on pension withdrawals.

HMRC processed 54,166 pension withdrawal repayments in 2025/26, worth around £188m, refunding affected savers an average of £3,470 each. The overtaxation stemmed from how the PAYE system handles pension withdrawals. When savers withdraw from their pension pot from age 55 onwards, 25 per cent is tax-free, but single large withdrawals are sometimes treated as monthly income because pension providers lack up-to-date tax codes for customers, causing HMRC to apply regular income tax rates.

Savers must apply for refunds themselves instead of receiving automatic repayment. Steve Webb, partner at pensions consultant LCP and former pensions minister, criticised the process as 'absurd', describing it as an unnecessary burden on both taxpayers and the department. He argued that for most people, basic rate tax deducted at source should be the standard approach.

Read the report

• HMRC hands back £3,470 each to thousands of people after overtaxing mistakeSavers must apply for money back instead of HMRC issuing an automatic refundBristolLive · 17 Oct, 11:22

In this story: HMRC · Steve Webb · LCP

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