From April to June 2025, nearly 13,000 people claimed an average refund of £3,800 each, totalling over £48.7 million for that period.
HMRC is returning £3,800 to UK households over ‘month one’ rule
HMRC is returning millions in overpaid tax on pension withdrawals. From April to June 2025, nearly 13,000 people claimed an average refund of £3,800 each, totalling over £48.7 million for that period.
HMRC’s method of taxing pensions during withdrawals is often incorrect. If you made a large withdrawal, you likely paid too much tax. When someone starts taking money from a private pension, HMRC often uses an emergency code.
This code treats the first withdrawal as a regular monthly income. As a result, a large lump sum can be taxed like a regular payment, leading to too much tax being taken. The emergency code only counts 1/12 of your annual tax-free allowance.
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Clarkwell & Co, a leading tax expert group, said: “Imagine taking out £20,000 from your pension for the year, only to discover that HMRC thinks you’ll get that amount every month. They view it as a monthly income of £20,000, which affects your tax code.
“As a result, you might be taxed as if your annual income is over £200,000. At Clarkwell & Co., we often meet pensioners confused about their high tax bills.
“After reviewing their statements, we find they are eligible for a tax refund on their lump sum pension. These cases show how important it is to seek advice before making large withdrawals. In some instances, clients have recovered over £5,000 in wrongly paid taxes just by submitting the correct forms.”
Hargreaves Lansdown expert Helen Morrissey said: “The overpaid pension tax saga continues to drag on. In just three months, HMRC has repaid a whopping £48.7m to people who paid too much tax for simply accessing their pension.
“With an average refund of around £3,800, these refunds amount to a significant chunk of change.
“The problem hits people who are taking a lump sum from their pension for the first time. They get taxed on what is known as a ‘month one’ basis, which means it’s treated as though the same amount will come out every month.
“This results in a far bigger tax bill, which can come as an unpleasant surprise or even de-rail people’s retirement plans.”
