HMRC repays £44m in overpaid tax as pensioners hit hard by 'outdated' system - check how much you could be owed

The figures highlight ongoing issues with the taxation of pension withdrawals despite recent efforts to improve the system.

The average refund amounted to nearly £3,000 per claim, according to retirement specialist Jamie Clark from Quilter.

Clark said: "The PAYE system, while serving its purpose for regular income, has often applied emergency tax codes to one-off withdrawals, resulting in a large number of overpayments."

This issue has been a persistent problem for retirees accessing their pension pots flexibly. Many find themselves significantly overtaxed initially and then face the challenge of reclaiming their money from HMRC.

In response to these ongoing issues, HMRC has introduced a new tax coding process from the current tax year. The change aims to streamline the system and reduce the administrative burden on pension savers.

Clark said: "HMRC's new tax coding process should not only reduce the administrative burden on savers, but with hope it will also minimise the number of overpayments being made in the first place."

The changes come after many experts slammed the system as outdated and archaic. Tom Selby, Director of Public Policy at AJ Bell, has criticised HMRC’s handling of flexible pension withdrawals, as new figures show over £1.4 billion has now been repaid to individuals overtaxed on their first pension withdrawal.

Selby said the current system "continues to hit hard-working savers in the pocket," with the average refund falling to £2,881 this quarter – the lowest in nearly six years. Despite the dip, he stressed that "too many people are still being overtaxed because of the Revenue’s outdated approach."

He also cautioned that the official figures may significantly understate the problem: "These figures are likely to be only the tip of the iceberg," he warned, as they only account for those who complete HMRC’s reclaim form.

Many others reclaim their overpaid tax through the end-of-year reconciliation process, meaning they must wait months to receive what they are owed.

HMRC’s new tax code system is expected to help solve the problem of emergency taxation on pension withdrawals by automating tax code updates for new pension recipients.

Despite the improvements, pension withdrawals remain challenging for many people.

Clark said: "Many people are still reliant on their pension savings to manage financial pressures, and any hasty decision to access these funds could not only result in unintended – and often unexpected – tax consequences, but they could also hamper longer term financial plans."

Clark emphasised the importance of seeking professional advice before making withdrawals.

"Financial advisers can ensure you are making any withdrawals in the most tax efficient way possible, and will also help make sure you remain on track to reach any long term goals."

While the new system offers hope for improvement, there's still uncertainty about its effectiveness.

He concluded: "With hope, we will see the number of repayment claim forms being process fall from here on out thanks to HMRC’s efforts to improve the system, but there is still a long way to go to ensure it works seamlessly.

"In the meantime, it is likely that some retirees will still face significant overpayments and subsequently the often arduous task of reclaiming their money.”