Since the introduction of the Pension Freedom rules, HMRC has refunded more than £1.5 billion to pensioners who were overtaxed when accessing their own savings. This overtaxation error has affected tens of thousands of retirees, sparking ongoing concerns about the tax system’s ability to handle pension withdrawals fairly.
In the third quarter of 2025 alone, pension savers reclaimed £48.5 million in overpaid tax, marking an 11% increase in claims compared to the same period last year. During these three months, 13,721 pensioners submitted claims for overpaid tax on pension withdrawals, pushing the cumulative repayments above the £1.5 billion threshold.
While the government implemented improvements from April 2025 aimed at moving people from emergency tax codes to the correct tax rates more swiftly during drawdowns, these changes fall short for those making one-off withdrawals. According to AJ Bell, this remains a “fundamental flaw” in the system that has persisted for over a decade since the Pension Freedom rules were introduced.
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Tom Selby, Director of Public Policy at AJ Bell, criticizes HMRC’s outdated approach, noting: “More than £1.5 billion has now been repaid to people initially overtaxed on their first withdrawal who have since had to fill out the relevant HMRC form to claim back their money. Many are still forced to take matters into their own hands, and these figures likely underrepresent the true scale, as they only account for those who filed claims.”
Jon Greer, Head of Retirement Policy at Quilter, echoes these concerns, emphasizing that thousands are overtaxed quarterly simply for accessing their savings. He explains that the Pay As You Earn (PAYE) system, designed for regular income, struggles to accommodate one-off pension withdrawals, creating unnecessary complexity for retirees.
Greer adds that the growing state pension, which increasingly consumes a larger portion of the personal allowance—combined with a frozen allowance and rising state pension—means more pensioners fall into the tax net. This situation exacerbates frustrations when over-deductions occur, especially those making withdrawals to supplement their income.
This latest data arrives amid uncertainty about the forthcoming Budget and speculation over potential changes to pension tax relief and allowances. Such uncertainty may cause some pensioners to act hastily, potentially undermining carefully planned financial strategies.
The ongoing issues underline the critical need for stability and transparent communication from the Government to maintain pension system confidence and ensure retirees are not unfairly burdened by avoidable tax complications.