The £1 trick to save pensioners overpaying £2.8k in tax

A staggering £44million was paid back to Britons who overpaid tax on their pension withdrawals between January and March, figures from the tax office show.

Data from HM Revenue and Customs (HMRC) showed more than 15,000 reclaim forms were processed during the first quarter, with an average reclaim of £2,881. Since 2015, more than £1.4billion has been paid back to pensioners who were taxed more than they should have on withdrawals. The issue stems from the 2015 pension reforms, which allow individuals aged 55 and over to withdraw flexible amounts from their pensions. However, HMRC systems often apply emergency tax codes to these withdrawals, mistakenly assuming they will recur monthly. This frequently results in savers being significantly overtaxed.

Although HMRC is working to improve the system, there are ways people can reduce the likelihood of being hit by a hefty tax bill from the get-go, and it can involve as little as £1.

Tom Selby, director of public policy at AJ Bell, said: “HMRC’s outdated approach to the taxation of flexible pension withdrawals continues to hit hard-working savers in the pocket. The average reclaim has fallen slightly this quarter to £2,881, its lowest level in almost six years. Despite this, too many people are still being overtaxed.”

Mr Selby noted there has been a recent improvement for some pensioners. He said: “HMRC has offered a glimmer of hope to those who take a regular drawdown income. From April 2025, the Government improved its tax code process so these people will be moved from an emergency code to paying the right amount of tax more quickly. But that doesn’t help those taking a one-off withdrawal who will continue to be overtaxed.”

Suggesting a practical workaround, Mr Selby said: “Savers planning a single withdrawal in a tax year might avoid an excessive tax hit by first making a small, notional withdrawal. This can help HMRC apply the correct tax code to the larger, subsequent withdrawal.”

This could involve withdrawing as little as £1 from their pension pots. Some pension providers may need you to withdraw a slightly higher sum, so savers are urged to speak with their providers first to check.

Alternatively, you can fill out one of three HMRC forms, and you should receive your tax back within 30 days.

Mr Selby said: “If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year.”

Which form you need to fill out will depend on how you have accessed your retirement pot. According to AJ Bell,

• If you’ve emptied your pot by flexibly accessing your pension and are still working or receiving benefits, you should fill out form P53Z
• If you’ve emptied your pot by flexibly accessing your pension and aren’t working or receiving benefits, you should fill out form P50Z
• If you’ve only flexibly accessed part of your pension pot, then use form P55.