Pensioners have been urged to do a quick tax code check as you could be overpaying by thousands of pounds.
Finance experts at credit score group CredAbility have sounded the alarm that you could be mistakenly be put on an emergency tax code and be owed a refund.
Aaron Peake, personal finance expert with the group, said: “One of the most common reasons for paying too much tax on your pension is taking a lump sum from a defined contribution pension.
“When you withdraw more than the 25% tax-free amount, HMRC often applies an emergency tax code, assuming you’ll be taking that amount every month. This can lead to an overpayment running into the hundreds or even thousands of pounds.”
He said another situation where you could be put on the wrong tax code is if you have several pension incomes or an annuity.
Mr Peake warned: “HMRC might apply the wrong tax code, meaning more tax is deducted than necessary. This can be especially common if your total income falls below the personal allowance (£12,570 for most people in the 2024/25 tax year).”
He pointed to three documents you should check to find out your tax code and establish if you are owed a refund: “Look at your pension statement, payslips, or your tax code notice.
“If your tax code ends in ‘W1’ or ‘M1’, that’s a sign emergency tax has been applied. You can also use HMRC’s tax checker online or call them if you’re unsure.”
If you are owed some cash from HMRC, your pension provider may be able to request the funds, or you can use HMRC’s P55, P53Z, or P50Z forms, depending on your situation.
Mr Peake explained: “These can be submitted online or by post. If you’re reclaiming tax from a previous tax year, you might need to write to HMRC instead.”
Vineta Bajaj, Group CFO of grocery delivery firm Rohlik Group, spoke about some of the common situations where pensioners could end up overpaying tax.
She said: “One of the most frequent is if you’ve taken money from your pension pot but are still on an emergency tax code. This can occur if you access multiple pension pots or if HMRC hasn’t updated your tax code to reflect the income you’re receiving.
“Another common scenario is when your pension provider doesn’t have the correct details about your tax situation, leading to tax being deducted at a higher rate than necessary.”
She warned that although the amount can vary, you could be owed a “significant” amount from HMRC. The money expert explained: “If you’re taxed at a higher rate because of a mistake, you could end up paying more than 20%, or even 40%, of your pension income in tax instead of the appropriate rate.
“Overpayments could range from a few hundred to several thousand pounds, depending on how much pension income you’ve received and how long the error has occurred.”
Ms Bajaj provided some tips for how to work out if you are owed cash: “The best way to check if you’re owed a refund is to review your pension payments and the tax you’ve been charged.
“You can check this by looking at your payslips or pension statements, comparing them to the tax codes on your documents, and ensuring they reflect your correct situation.
“If you notice any discrepancies or think you’ve been taxed too much, it’s a good idea to contact HMRC or use the online services they offer to check your tax position.”
