Thousands of state pensioners and older households across the UK could be in line for a significant financial windfall this festive season due to an often-overlooked tax rule. Those with a specific two-digit tax code may be owed an average of £3,539 in overpaid tax from HM Revenue and Customs (HMRC).
What the 'M1' Tax Code Means for Your Pension
The issue centres on the tax treatment of pension withdrawals. Individuals over 55 with defined contribution or personal pensions can typically take 25% of their pot tax-free. However, problems arise when savers take a large, one-off lump sum on their first withdrawal. In these cases, HMRC often applies an 'emergency' higher rate of tax.
This emergency taxation is triggered by the 'Month 1' or 'M1' tax code. If your tax code ends with these two digits, it means your tax is calculated only on that month's income, not your annual allowance, leading to frequent overpayments. You can find your tax code on the HMRC app, your payslip, or a Tax Code Notice letter.
How to Reclaim Your Overpaid Tax
Between July and September 2025 alone, HMRC repaid a staggering £48,560,205 to pension savers caught by this rule. The process for reclaiming your money is straightforward but requires action.
Pension experts like PensionBee advise contacting HMRC directly. A spokesperson explained: "You can reclaim emergency tax on pensions by contacting HMRC directly. They will check your tax record and, once you’ve settled any outstanding amounts due, they will issue a new tax code to your pension provider."
This new code can then be used to calculate future tax, potentially offsetting what you have already overpaid. However, this is at your pension provider's discretion.
Important Exceptions and Next Steps
There is a crucial caveat: if you have withdrawn your entire pension pot as a single lump sum, you cannot reclaim overpaid tax through future pension payments. In this scenario, you must act directly with HMRC.
To get your refund promptly, you need to complete an official HMRC claim form. Alternatively, you can wait until the end of the tax year (5 April), when HMRC will usually generate an automatic refund if you have overpaid.
With the average refund standing at over £3,500, checking your tax code could provide a substantial and timely financial boost for eligible pensioners.
