Thousands of pension savers have received more than £50 million in tax refunds from HMRC in just three months, with an expert warning people not to ignore an unexpectedly large tax deduction.
Around 12,500 savers received refunds, meaning the average repayment was almost £4,000 per person.
The warning comes as HM Revenue & Customs has also published updated guidance explaining how pension income, including the State Pension, is taxed.
Personal finance expert Kevin Mountford, co-founder of Raisin UK, said people making flexible pension withdrawals should check whether emergency tax has been deducted.
“An average refund of almost £4,000 is a significant amount of money,” he said.
“People making flexible pension withdrawals can sometimes find that emergency tax is deducted, particularly on an initial withdrawal.”
He urged savers not to automatically assume a large tax deduction is correct.
“If the amount of tax taken looks unexpectedly high, it may be worth checking the tax code used and whether an overpayment has been made rather than simply assuming the deduction is correct,” he said.
Why might HMRC take too much tax from a pension?
When someone makes a flexible pension withdrawal, particularly an initial withdrawal, an emergency tax code can sometimes result in more tax being deducted than is ultimately due.
The tax position can then be corrected, with HMRC refunding money where an overpayment has been identified.
Mountford said the process for getting money back can depend on how someone accessed their pension.
“Depending on how someone has accessed their pension, they may be able to apply directly to HMRC for a refund rather than waiting for their tax position to be reconciled automatically,” he said.
That makes it worth checking pension paperwork and tax information after taking a withdrawal, rather than simply accepting the amount that has been deducted.
This bank holiday, we are paying certain benefits early – on Friday 28 August
Find out more: https://t.co/g9Fv2Cn9go pic.twitter.com/C8v4Dg2uqT— Department for Work and Pensions (@DWPgovuk) August 14, 2026
State Pension is taxable too
HMRC's latest guidance, published last month, makes clear that the State Pension counts as taxable income.
However, tax is not deducted from the State Pension before it is paid.
Instead, HMRC adds a person's State Pension entitlement to their other taxable income when working out whether Income Tax is due.
You only pay tax if your total taxable income is above the allowances available to you.
For people who receive other income from employment or private pensions, HMRC will usually adjust their tax code so that the tax due on their State Pension is collected from their wages or another pension.
If HMRC cannot collect the tax this way, it may send the person a Simple Assessment tax calculation after the end of the tax year.
Your State Pension can push up your tax bill
The State Pension is therefore not tax-free simply because no tax is taken from the payment itself.
HMRC adds it to other taxable income before calculating the amount of Income Tax due.
For example, someone receiving the State Pension alongside a workplace or private pension could have enough total taxable income to become liable for Income Tax.
HMRC says the calculation works by adding the State Pension to other taxable income, taking off relevant allowances and then applying the Income Tax rates that apply.
This is particularly important for people drawing money from several different sources during retirement.
What should pension savers check?
If you've recently accessed your pension, it could be worth checking:
- How much you withdrew
- How much tax was deducted
- The tax code applied to the payment
- Whether an emergency tax code was used
- Your other taxable income for the year
- Whether HMRC has subsequently issued a refund
If you receive the State Pension, you should also remember that it counts towards your taxable income even though tax is not taken off the payment before you receive it.
HMRC says people completing a Self Assessment tax return must include their annual State Pension entitlement amount.
Those using Making Tax Digital for Income Tax must also check that their State Pension entitlement is included when submitting their return. The full details are listed here HMRC guidance: How your State Pension is taxed.
Recommended reading:
- Energy bill warning as Government urged to make major change this year
- Rip-off subscriptions and fake discounts face crackdown under new Andy Burnham rules
- HMRC issues Child Benefit warning as thousands of parents face losing payments
How HMRC calculates State Pension tax
There is an important detail in the way HMRC calculates the taxable amount.
It uses the State Pension you were entitled to receive during the tax year, rather than simply adding up the payments that actually reached your bank account.
HMRC says that if the State Pension rate changes in April, it calculates a full year's entitlement using one week at the old weekly rate and 51 weeks at the new rate, where applicable.
For example, HMRC gives a scenario where the weekly State Pension is £160 before the April increase and £170 afterwards.
The taxable amount would be:
- £160 for one week
- £170 for 51 weeks
- £8,830 total taxable State Pension
If someone starts receiving their State Pension part-way through a tax year, HMRC calculates the taxable amount based on the number of weeks they were entitled to receive it.
Have you had a tax refund? Tell us in the comments below.
Share