HMRC set to end overtaxing pension issue

HM Revenue and Customs (HMRC) is changing its systems to end emergency taxing pensioners on their retirement savings.

It has announced plans to improve tax code processing for people as they start to receive their private pension.

The changes, starting in April, aim to ensure people pay the correct amount of tax right from the beginning of their payments.

When pension freedoms were introduced in 2015, people with defined contribution (DC) pensions were permitted to take their cash out in chunks rather than having to buy an income for life.

At that time HMRC chose to apply emergency tax codes to those withdrawals, meaning that people often ended up paying more tax than they should have and then had to claim it back.

According to reports, more than 470,000 claims have been made for refunds totalling £1.37bn through the HMRC system.

Now it has announced that it will move more quickly to replace emergency tax codes with regular ones which will make sure the correct amount of tax is deducted in real time.

An HMRC spokesperson said: “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 from the outset.

“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.

“There is no need to contact HMRC and once a tax code has been changed, we’ll inform customers by letter or digitally if they’ve signed up for paperless in the HMRC app or online.”

The spokesperson added: “This small change is part of our wider commitment towards improving our customer service experience.”

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