The data reveals that over 13,700 reclaim forms were processed between July and September, with the average rebate amounting to £3,539 per person.

This brings the total amount reclaimed since the introduction of pension freedoms in 2015 to more than £1.5 billion, highlighting a persistent flaw in the tax system. The issue arises because HMRC applies an emergency ‘Month 1’ tax code to a person’s first flexible pension withdrawal in a tax year. This method effectively assumes the withdrawal will be repeated every month, leading to a significant initial overpayment, often running into thousands of pounds.

While HMRC’s system automatically corrects the tax position for those taking a regular income, individuals making a single lump sum withdrawal are likely to remain out of pocket unless they take action.

Tom Selby, director of public policy at AJ Bell, said: “MRC has moved to offer some respite to those who take a regular drawdown income. From April 2025, the government improved its tax code process so people are moved from an emergency code to paying the right amount of tax more quickly. But that doesn’t help those taking a one-off withdrawal, who will continue to be overtaxed. 

“One way savers planning to take a single withdrawal in a tax year can potentially avoid the shock of a big overtaxation bill is by taking a notional withdrawal first. This should mean HMRC is able to apply the correct tax code to the second, larger withdrawal.

“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.

“Savers frustrated by this tiresome process will be less than impressed by the government’s new proposal to leverage inheritance tax (IHT) on pensions, which will also result in the need for tax refunds in some cases. Once the convoluted process proposed by government is implemented in April 2027, some beneficiaries will find they overpay income tax in the process and will need to claim a refund, heaping yet more fiddly admin on taxpayers.”