You could be owed thousands of pounds (Image: Getty)
People are being called on to check their tax after a warning they could be owed thousands of pounds. Millions of pounds has been overpaid to HM Revenue and Customs since changes were introduced in 2015.
Since then those over the age of 55 have been able to withdraw funds from their pension pot. However many people taking out money for the first time have been taxed at an “emergency rate”.
This means they could have overpaid thousands of pounds. The consumer organisation said had refunded pension savers £49.5 million between the beginning of October and December 31 last year alone.
The figures revealed more than 14,000 reclaim forms had been processed during the quarter, giving people on average a refund of £3,389. It added: “Almost £1.4 billion has now been reclaimed by people overtaxed on pension withdrawals since 2015.”
Which? explained people can access their pension pot in two ways. The first via an (UFPLS) which allows you to take a 25% lump sum of your pension tax-free with the rest charged at your normal income tax rate,
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Alternatively, people can take a lump sum from a pension drawdown plan. If you do this, 25% of your total pension savings is tax-free and any further withdrawals are subject to income tax.
Which? explained: “Your pension company collects the tax on your behalf, so the lump sum you get is paid net of tax. However, many people overpay tax the first time they withdraw from their pension. This is because your provider may not know what your tax code is or details of other income, if you have any.
“If your provider doesn’t have this information, withdrawals are taxed using a higher-rate emergency tax code, calculated on what’s known as a ‘Month 1’ basis. This means you’ll be taxed as though the lump sum you’re withdrawing will be repeated every month.
“For instance, a £10,000 withdrawal could see you being taxed as though your annual income is £120,000. If this goes unnoticed, it can make an unnecessary dent in your pension pot.”
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is making changes to improve this from April. Which? said: “From April 2025, the government will improve its tax code process so these people will be moved from an emergency code to paying the right amount of tax more quickly. will adjust tax codes to ensure that over the course of the year you are taxed the correct amount.”
Those affected will then be notified by letter or digitally that their tax code has been changed. Steve Webb, former pensions minister and partner at LCP, added: “This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax.
“The tax system is complex enough as it is, and this change should hopefully reduce the complications which pension savers face when they try to access their hard-earned cash.”
It is worth checking to see if you qualify for the refund (Image: Getty)
Could you be owed a refund?
Which? advises that anyone taking a steady stream of income via drawdown, shouldn’t need to take any action as should adjust the tax code to ensure the correct amount is paid over the year. However, those making a single withdrawal should check they haven’t paid more than necessary. You can do this online via the
If you have been overtaxed you can claim using one of three forms:
- P55 – a should be used if you haven’t withdrawn your entire pension pot and are not taking regular payments
- P53Z – a should be completed if you have withdrawn all your pension and also receive other taxable income
- P50Z – a should be completed if you’ve withdrawn all your pension, but have no other taxable income.
Anyone who does not want to use the online service, can fill out a form on-screen, print it off and post it to , or print off and fill in a form by hand. says you should receive a refund of your overpaid tax within 30 days.