State Pensioners Born Before 1960 Urged to Withdraw £1 Before HMRC Bill
State pensioners with private pension pots are being encouraged to withdraw a nominal sum of £1 from their savings to avoid a significant HMRC overtaxation issue. Data from HMRC reveals that overtaxation on withdrawals from pension pots has reached a staggering £44 million between January and March of this year.
According to HMRC figures, the first quarter of 2026 saw 13,942 reclaim forms processed, with an average reclaim amount of £3,165. Since 2015, approximately £1.6 billion has been reclaimed by individuals who were overtaxed on pension withdrawals.
Tom Selby, director of public policy at AJ Bell, commented: “Now more than 11 years since pension freedoms and flexible pension withdrawals were introduced, the spectre of pension overtaxation continues to loom over HMRC. The fact HMRC is still yet to address one of the enduring flaws in its approach to taxing those who choose to flexibly access their pension pots means many are forced to take matters into their own hands to be reunited with their money.”
Selby added: “But these figures are likely to barely scratch the surface, as they only capture those who fill in the relevant HMRC reclaim form. In reality, many will be reliant on HMRC putting their affairs in order after the end of the tax year.”
How to Avoid Overtaxation
To ensure you are not overtaxed, state pensioners—particularly those born before 1960—are being urged to consider withdrawing a nominal sum, such as £1, before making a larger withdrawal. This strategy helps HMRC apply the correct tax code to subsequent withdrawals.
Selby explained: “One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.”
Alternatively, individuals can fill out one of three HMRC forms and should receive their tax back within 30 days. If they do not do this, HMRC states it will put them back in the correct tax position at the end of the tax year.
Concerns Over Inheritance Tax Changes
Selby also highlighted concerns about the government’s plan to leverage inheritance tax (IHT) on pensions, which may lead to further tax refund needs. “Once the convoluted process proposed by the government is implemented in April 2027, some beneficiaries may find they overpay income tax in the process and will need to claim a refund, heaping yet more fiddly admin on taxpayers,” he said.
