HMRC to end overtaxing of first pension withdrawals from April 2025

HMRC has changed its process so that tax codes are automatically updated for people newly receiving a private pension, with the change taking effect from April 2025¹. The announcement was made in HMRC's Pensions Schemes Newsletter, published on 23 January 2025¹. The change is intended to end the practice of overtaxing first pension withdrawals for some savers, which previously left people having to claim back overpayments from HMRC or wait until the end of the tax year for the money².

Since 2015, HMRC has taken extra tax on initial drawdown withdrawals². The first payment is often taxed using an emergency tax code on a "month one" basis, assuming it is the first of a number of withdrawals over the rest of the tax year². Where a provider does not hold a saver's tax code or details of other income, withdrawals are taxed using a higher-rate emergency tax code on that basis, so a £10,000 withdrawal could result in someone being taxed as though their annual income is £120,000¹.

HMRC said:

HMRC also said it will automatically update the tax code for customers on a temporary tax code who would benefit from being on a cumulative code, meaning they avoid an overpayment or underpayment at the end of the year². It said it will inform those affected by letter or digitally that their tax code has been changed¹.

The change assists those taking regular income from pension drawdown but not savers taking lump sums². Investment firm AJ Bell warns that those who make a single ad-hoc withdrawal from their pension may still be left out of pocket¹. TaxAid states that in most cases a refund cannot be claimed during the tax year unless it is a single withdrawal for that year, and that HMRC will otherwise check everything at the end of the tax year as part of its reconciliation process³.

Refunds continue to be paid. A total of £50,353,656.76 was repaid from 1 April to 30 June 2026, according to HMRC data, with 12,612 reclaim forms processed in the quarter and an average repayment of £3,992¹. Since 2015, more than £1.6bn has been reclaimed by people overtaxed on pension withdrawals, a milestone passed in autumn 2025¹.

Why it matters for households

People starting to take money from a private pension, whether through drawdown or an uncrystallised fund pension lump sum, are the group affected. Under the previous process, a first withdrawal could be taxed as though it would be repeated every month, producing a larger deduction than the year's actual liability¹. The change means tax codes are updated automatically for those newly receiving a private pension, so the correct amount is deducted in real time².

The practical effect differs by how the money is taken. Those drawing a regular income should have their code adjusted without needing to act¹. Those making a single ad-hoc withdrawal may still be overtaxed and may need to claim a refund¹. TaxAid notes that where only part of a pot is withdrawn, the provider will not issue a P45 because the pot remains active, and HMRC may send an updated tax code to the provider for future payments³.

Where a refund is due, HMRC says it should be received within 30 days¹. Claims are made using form P55 if the pot has not been fully withdrawn and no regular payments are being taken, P53Z if the pension has been fully withdrawn alongside other taxable income, or P50Z if the pension has been fully withdrawn with no other taxable income¹. TaxAid gives the same three forms and adds that a P800 tax calculation is sent where tax has been overpaid or underpaid by £50 or more, which should automatically refund what is owed³.

What happens next

The tax code change took effect from 6 April 2025³. HMRC has not reported any further change to the process beyond the automatic updating of codes for new private pension recipients². Savers in Self Assessment must still include the pension withdrawal and any claim in their tax return at the end of the year, even if some tax was reclaimed earlier³. Free guidance on pension options is available through Pension Wise.