In 2015, modifications to pension regulations have resulted in increased accessibility to pensions.
Since then many individuals have been wrongly taxed due to incorrect pension tax codes, often resulting in thousands of pounds being owed to them.
Overpaying tax on pension lump sums originates from the use of emergency tax codes with HM Revenue & Customs (HMRC) refunding approximately £1 billion in excess pension tax since the process has been in use.
By using an emergency tax code (for example BR) HMRC has in many cases deducted additional tax from the amount withdrawn from pension funds, with the mistaken belief that this withdrawal would be considered as the first payment in a series of monthly payments for the remainder of that tax year.
Anyone who overpaid tax on a pension lump sum typically either has to wait until after the tax year ends to have their income tax refunded automatically by HMRC or, complete a form and send it to HMRC if they want their tax refunded in the current tax year.
To avoid overpayments of tax paid on pension lump sums HMRC is changing the way their tax coding process works.
The change which comes into effect from the 25/26 tax year aims to guarantee that an accurate tax deduction is made in real-time which removes the need to refund overpaid tax.
HMRC states:
“From April 2025 we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax faster. We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year.”
According to the January 2025 newsletter (issue number 166) from HMRC announcing the change, individuals who are currently on a temporary tax code and would benefit from switching to a cumulative code will have their tax code automatically updated.
This in theory prevents any overpayment or underpayment at the end of the year and should mean from the 2025-2026 tax year you shouldn’t need to make a claim to have overpaid pension tax repaid.
HMRC confirms that the PAYE rules on how much tax is payable on pension lump sums isn’t changing just the way in how income tax is collected in some cases.
Determining if you are eligible for a pension tax code refund
If you are at least 55 years old (the current age for accessing your pension pot, but will increase to 57 in 2028), and have withdrawn a taxable lump sum or your entire pension amount at once, you may be eligible for a tax rebate from HMRC.
You can use the HMRC smartphone app or online personal tax account service to check your income tax deductions and what your current tax code is.
HMRC will issue a notice of coding to confirm what tax code will be used against your pension lump sum payment.
With the new system in place from April 6 2025 it’s not expected that you will need to contact HMRC about your pension payment tax code.
HMRC have confirmed that “You do not need to make any changes to your tax coding process as we will automatically change these codes.”
How do I claim a refund on pension tax?
You have the option to immediately request a refund and even if no action is taken, HMRC will automatically return the excess tax to you after the current tax year ends on April 5.
If you don’t want to wait for HMRC to automatically refund overpaid tax on a pension lump sum you can use a form P50Z, P53, P53Z or a P55 all of which can be sent to HMRC online or by post.
The type of HMRC form you will need depends on the type of pension lump sum you have taken.
Pension tax guidance and information
Before deciding to take a lump sum from your pension, it is advisable to collect comprehensive information to make decisions that suit your retirement objectives.
Depending on your specific pension related questions, you may consult your pension provider, HMRC, or the tax charity Tax Help for Older People for assistance.
