State pensioners are being urged to use a simple £1 trick to escape a potential £3,100 tax bill. Department for Work and Pensions (DWP) state pension claimants have been told that withdrawing a nominal sum can prevent them from overpaying thousands in emergency tax.
Emergency Tax Overpayments on the Rise
HMRC's latest figures reveal that between January and March this year, almost 14,000 people had to reclaim tax after accessing their pension flexibly. More than £44.1 million was repaid in just three months, according to wealth management company Quilter.
Quilter's Retirement Specialist, Adam Cole, said the average payout is slightly over £3,160. He commented: "That suggests fewer people may be caught by emergency tax, but when it happens the sums involved are larger, leaving retirees out of pocket while they wait for HMRC to return their own money."
How the £1 Trick Works
Tom Selby, director of public policy at investment platform AJ Bell, explained that improvements to the Government's tax code process mean people can be moved more quickly from an emergency code to the correct one. He advises savers who want to make a single withdrawal in a tax year to first withdraw a notional sum, like £1, to avoid being overtaxed.
Selby added: "Alternatively, you can fill out one of three HMRC forms and you should receive your tax back within 30 days. If you don’t do this, the Revenue says it will put you back in the correct tax position at the end of the tax year."
Expert Advice for Retirees
Adam Cole further noted: "Until pension taxation better reflects how people actually access their money in retirement, thousands of savers will continue to face unnecessary complexity and cashflow disruption." He emphasised that PAYE was designed for predictable monthly earnings, not ad hoc pension withdrawals, leading to avoidable overpayments that must be corrected after the fact.
Cole urged retirees to plan carefully before making withdrawals and to seek professional advice to avoid overpaying tax upfront. He concluded: "In broad terms, the draft regulations are functional rather than radical, providing reassurance that access at 55 will continue to be treated as an authorised event for those who already qualify."
