The UK’s HM Revenue and Customs (HMRC) has announced a significant overhaul of its tax code processing for new private pension recipients, a move set to take effect from April 2025. The changes are designed to address a longstanding issue with applying emergency tax codes, which has led to widespread overtaxation of pension withdrawals.
Since the introduction of pension freedoms in 2015, savers with defined contribution pensions have had the flexibility to withdraw their savings in chunks. However, this flexibility came with an unintended drawback. HMRC’s application of emergency tax codes on these withdrawals often resulted in individuals paying significantly more tax than necessary. To rectify this, taxpayers were required to navigate a claims process to recover the excess amounts.
Between October and December 2024 alone, HMRC repaid £49.5 million in overtaxed pension withdrawals. Since 2015, more than 470,000 individuals have made refund claims, amounting to a staggering £1.37 billion in reclaimed funds. Former Pensions Minister Steve Webb described the current system as “scandalous” and welcomed the upcoming changes.
“It is great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this system. For too long, hundreds of thousands of people have been overtaxed and had to jump through hoops to claim back their own money,” he said.
The new tax plan aims to eliminate both overpayments and underpayments by ensuring that pension recipients are taxed correctly from the outset. HMRC confirmed that it would automatically update tax codes for individuals who are on temporary codes and would benefit from being switched to cumulative codes. This change will prevent end-of-year adjustments and remove the need for taxpayers to claim refunds or settle additional tax liabilities.
“From April 2025, we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset,” HMRC stated. The agency emphasized that the changes would be implemented seamlessly, requiring no action from pension providers or taxpayers. Affected individuals will be notified automatically, either via letter or digital communication channels, based on their preferences.
The move has been broadly welcomed as a step toward simplifying the pension taxation process. Industry experts have noted that the reliance on emergency tax codes has caused unnecessary financial and administrative burdens for pensioners. Many savers, particularly those unfamiliar with tax procedures, found the refund process confusing and time-consuming.
By automating tax code updates and ensuring accuracy from the start, the new system is expected to alleviate these issues and provide a smoother experience for pensioners. HMRC reassured taxpayers that the transition to the new system would not require any changes to pension providers’ tax coding processes, ensuring minimal disruption.
The reform reflects HMRC’s broader efforts to modernize and improve the tax system’s fairness. For pensioners, this change marks the end of a frustrating chapter and the beginning of a more straightforward and equitable taxation process. As the April 2025 implementation date approaches, HMRC has committed to keeping affected individuals informed and ensuring a seamless transition to the new system.