Pension savers reclaimed £48.5 million in overtaxation on pension withdrawals between July and September 2025, the latest figures from HM Revenue and Customs has shown.
Over 13,700 reclaim forms were processed during the quarter, with an average reclaim of £3,539.
It takes the total figure reclaimed since 2015 to more than £1.5 billion.
Tom Selby, director of public policy at AJ Bell, said the latest figures demonstrate HMRC’s failure to address “longstanding flaws” in its approach to flexible pension withdrawals.
Selby said: “This outdated approach means many are forced to take matters into their own hands to be reunited with their money, but these figures are likely to only be the tip of the iceberg, as they only capture those who fill in the relevant HMRC reclaim form. In reality, many will be reliant on HMRC putting their affairs in order at the end of the tax year.
“HMRC has moved to offer some respite to those who take a regular drawdown income. From April 2025, the Government improved its tax code process so people are 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.”
Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis, meaning HMRC divides the usual tax allowances by 12 and applies them to the withdrawal, resulting in tax bills that often run into thousands of pounds.
Selby said one way savers planning to take a single withdrawal in a tax year can potentially avoid an overtaxation bill is by taking a notional withdrawal first, meaning HMRC is able to apply the correct tax code to the second, larger withdrawal.
Selby added: “Savers frustrated by this tiresome process will be less than impressed by the Government’s new proposal to leverage inheritance tax on pensions, which will also result in the need for tax refunds in some cases.
“Once the convoluted process proposed by government is implemented in April 2027, some beneficiaries will find they overpay income tax in the process and will need to claim a refund, heaping yet more fiddly admin on taxpayers.”
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