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More than half a million retirees have been hit by excessive tax bills when dipping into their pension pots — with some overcharged by thousands of pounds.
Figures released by HM Revenue and Customs reveal that £48.7 million in overpaid pension tax was refunded in the last three months alone, covering April to June 2025.
Since the pension freedoms were introduced in 2015, savers have been wrongly taxed by a staggering £1.2 billion, affecting at least 574,000 people who accessed their pensions flexibly.
The error stems from the way HMRC applies emergency tax codes when pension pots are accessed for the first time. Instead of taxing just the amount withdrawn, HMRC assumes the same sum will be taken every month — resulting in punitive deductions.
Campaigners and experts have branded the situation a “disgrace” and are demanding urgent reform. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “These people have done the right thing, saved hard for their retirement only to be caught up in a tax mess that takes months to unwind.”
She added: “The system of emergency tax leaves thousands of people out of pocket every year and reliant on a repayment system that can take months to sort out. People can reclaim the money via a form, but many don’t realise this and have to wait until they receive a rebate through their tax return.”
The average refund in the last quarter was around £3,200 per person, suggesting some retirees could have been overcharged even more — especially if they took larger one-off lump sums.
Under pension freedom rules introduced a decade ago, over-55s can withdraw money from their defined contribution pensions as they wish. But unless a pension provider can apply a correct tax code, HMRC typically applies an emergency one — taxing the withdrawal as if it is the first of 12 monthly payments.
Steve Webb, a former pensions minister and partner at LCP, said: “It remains a disgrace that HMRC continues to overtax hundreds of thousands of people every year and expects them to fill in forms to get their money back.”
A spokesperson for HMRC said: “Nobody overpays tax as a result of taking advantage of pension flexibility. Individuals can claim any overpaid tax back from HMRC. We aim to process these repayments within 30 days.”
But critics argue the system should not rely on retirees to chase refunds at all — particularly at a time when many are grappling with rising bills.
Helen Morrissey warned that the situation could deteriorate further in the coming months as more people tap into their pensions to cover the cost of living. She said: “With pressure on people’s finances many may turn to their pension for help and risk being taxed too much at a time when they can least afford it.”
The revelations will fuel calls for an overhaul of the system to ensure savers are taxed correctly the first time rather than being forced to navigate a complex bureaucracy just to retrieve their own money.
