Revealed: how some pensioners clawed back more than £50,000 emergency tax on retirement income

Published  28 February 2024
   4 min read
  • Royal London has obtained information revealing the full scale of HMRC’s emergency taxing of pensioners
  • Data released under FOI rules reveals 2,300 incidents of pensioners being charged an extra £10,000 or more — with some forced to claim back figures in excess of £50,000 

Around 2,300 individual pensioners successfully claimed back more than £10,000 emergency tax on retirement income, according to the information released.

Royal London, the UK’s largest mutual life, pensions and investment provider, obtained information from HMRC revealing the full scale of the issue following a Freedom of Information (FOI) request.

According to the data, 9,700 pensioners claimed back £5,000 or more in the tax year 2022-23, with 2,300 of those claiming over £10,000, and 300 receiving a cheque for more than £15,000.

The average refund per saver was £3,062, but the top 100 claimed back sums averaging £54,185, according to the data.

Changes to pension rules in 2015 meant people can withdraw some or all of their defined contribution pension savings as lump sums from the age of 55.

However, taxation of pension withdrawals is similar to taxation of any other income, with an 'emergency' rate being applied where there isn’t a tax code. This means that HMRC taxes the amount withdrawn as if that will be the pension saver’s monthly income every month for the rest of the tax year.

For a first withdrawal, someone taking out £30,000 would normally receive £7,500 as tax free cash (25%) and the remaining amount is taxed as if their monthly income is £22,500, even if the pension holder has no intention of taking further pension income that year. In other words, they pay £8,503 in emergency tax, however if basic rate tax was applied it would be £1,984. The difference – an additional £6,519 – needs to be claimed back.

Clare Moffat, pension expert at Royal London, commented: "Naturally, this could come as a huge shock to some people, especially if they had earmarked the money for something specific like a holiday or home improvements. Suddenly, a big chunk of the money they thought they had coming to them has in fact gone to pay emergency taxes, which they probably hadn’t anticipated.

"The pension savers charged over £50,000 in emergency tax will of course be extreme cases. To trigger a tax bill of this size, they will have taken out a lump sum in excess of £200,000. There aren’t too many scenarios in which someone will need this amount, except maybe to help their children or grandchildren get a foot on the housing ladder."

A growing number of investors are falling foul of the rules each year as cost-of-living pressures force more and more people to dip into their pensions.

To get the money back, they must complete one of three forms and then wait for a refund.

Those who fail to fill out the paperwork must wait on HMRC to review the payments later — meaning they are often left out of pocket for many months. Approximately, £1billion has been overcharged since 2015*.

Value Number of claims
0-£1000 13,000
£1,000-£2000 9,000
£2,000-£3000 7,000
£3,000-£4,000 7,500
£4,000-£5,000 4,000
£5,000-£6,000 2,500
£6,000-£7,000 1,700
£7,000-£8,000 1,400
£8,000-£9,000 1,000
£9,000-£10,000 800
£10,000-£11,000 600
£11,000-£12,000 400
£12,000-£13,000 400
£13,000-£14,000 500
£14,000-£15,000 100
£15,000-£16,000 200
£16,000 + 100

Source: HMRC FOI 2022-23 tax year

One way for people to avoid emergency tax when taking money out of their pensions is by   making a small initial withdrawal which will trigger a less punitive tax code on future withdrawals. However, this is less practical if the full amount is needed quickly.

Clare Moffat added: "These are not small sums and illustrate how the current system is springing an unwelcome surprise on many at a time of their lives when they can least afford it.

"People are handing more money to HMRC than they should, but there are ways to avoid this. While there may be a desire or an urgent need to make your first pension withdrawal a large one, you should be mindful that you may find yourself charged excessive tax.

"A far better approach is to make your initial withdrawal a modest one and this will govern how much tax you pay on future withdrawals. If you do need to make a large withdrawal, remember that you will pay more tax, especially if you have a large purchase in mind or something you need the money for."

Notes to editor

HMRC data covers the tax year 2022-23.

HMRC data covers individual claims rather than persons. One individual may submit more than one request.

*Pensions: Tax overpayment of £1bn prompts reform call - BBC News

For further information please contact:

Gary O’Shea – Senior Consultant, Powerscourt Group

Royal London – Press Office

About Royal London

Royal London is the largest mutual life, pensions and investment company in the UK, and in the top 30 mutuals globally, with assets under management of £162 billion, 8.6 million policies in force and over 4,200 employees. Figures quoted are as at 31 December 2023. Learn more at royallondon.com.