HMRC refunding millions to pensioners as some more at risk of overpaying tax

HMRC is dishing out millions in tax refunds to pensioners, with fresh figures revealing retirees are pocketing an average of £3,800 for refunds processed between April 1 and June 30 this year. The tax authority has handed back £48.7million during this period across nearly 13,000 refund forms. This payout stems from HMRC's method to calculating tax on pension income, using what's dubbed a "month one" calculation method that uses a person's first month of pension income to work out their potential tax bill for the entire year.

The issue with this system is that the tax authority only applies one-twelfth of a person's annual tax-free allowances to the calculation, and it assumes the same income will repeat every month despite retirees having flexibility over when and how much to withdraw. The calculation can work properly if you consistently withdraw the same amounts from your pension, meaning the month one calculation closely mirrors your yearly income.

But if you withdraw one hefty lump sum from your pension to last the entire year, you'll be stung with an excessive tax bill because HMRC's calculation assumes you're receiving that massive payment monthly rather than as a one-off. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warned This Is Money: "If you do get clobbered with a big tax bill, then you will need to fill out one of three forms so that HMRC can process the refund.

"Otherwise, you can wait until the end of the tax year." To avoid overpaying tax, the expert suggested making a modest initial pension withdrawal, allowing HMRC to more accurately assess your tax obligations.

Alternatively, if you have already paid too much tax, reclaim it using forms P55, P53Z, or P50Z, depending on your situation - details of which are available on the Gov.uk website. The government's also provides a complimentarytool to check if you're owed a refund and guides you through the claim process.

Quilter's head of retirement policy, Jon Greer, shared withGB News: "The latest pension flexibility statistics reveal HMRC's is still fighting the scourge of pension tax overpayment despite a streamlining the process of providing updated tax codes for people who are new to receiving a private pension, from the current tax year. In Q2 alone, 12,767 repayment claims were processed, amounting to £48,701,927, with the yearly total hitting around £92m. That's nearly £4,000 back in each taxpayer's pocket on average for the quarter."

Despite HMRC's April efforts to simplify tax for fresh private pension recipients by updating their tax codes, refunds have surged by over £4 million in the last three months when compared January to March 2025.