**Thousands of Pensioners Hit by HMRC Emergency Tax Error – How a Simple Step Could Save You £2,900**
A significant number of UK pensioners are finding themselves out of pocket following errors with HMRC emergency tax codes, according to financial commentators and recent reports. Latest official data reveals that over the first quarter of 2025 alone, more than £44 million in excess tax was wrongfully collected from savers aged 55 and over, forcing thousands to engage in the lengthy process of claiming these sums back from the tax authority.
This unexpected issue largely affects those taking advantage of the pension freedoms introduced a decade ago, which allow individuals to access portions of their pension pot before retirement. While offering users flexibility, this system also exposes them to administrative quirks that can end up costing a significant amount.
Laura Pomfret, a finance specialist speaking on BBC’s *This Morning Live*, warned viewers about the prevalent error. She described the scale of the problem: “To put it into context, it’s affecting an estimated 15,000 people this year, with each losing an average of £2,900 due to incorrect emergency tax application. This isn’t a trivial sum – it represents a serious financial misstep.”
The root cause of the issue lies in how HMRC processes lump sum withdrawals from pensions. When someone elects to take a one-off payment – often for important outlays like home renovations – HMRC’s system currently assumes that this amount will be taken out every month. This error pushes the individual into an assumed higher tax bracket, triggering excessive emergency tax withholdings on the spot.
BBC’s Cost of Living correspondent Coletta Smith elaborated on air: “For the first 25% of whatever you withdraw from your pension, it’s tax-free. Anything beyond that, you’re liable to pay tax on. But there’s a catch – HMRC hasn’t updated its processes adequately for the changes that came with pension freedoms. So if you take out £5,000 in a single month, the system presumes you’ll do this repeatedly across the year, massively inflating your expected annual income in the eyes of the taxman.”
The problem is compounded by the allocation of emergency tax codes such as W1, M1, or X, which are meant as temporary measures but end up resulting in higher deductions until rectified. Many face a wait until the following tax year before any adjustment is made, unless they proactively submit a reclaim.
Recently, there’s been a partial improvement to the system. Since April, the government has streamlined the tax code update process for regular pension withdrawals – now typically adjusting the code within a month. Despite this, pensioners making a single large withdrawal still frequently encounter over-taxation.
Pomfret cited a typical example: should a 60-year-old withdraw £10,000 as a lump sum, they may be taxed as if they are drawing out £10,000 monthly, with emergency tax rates as high as 40 per cent deducted at source. She stressed the need for vigilance: “Check your tax code. If it ends in W1, M1, or X, it means you’re probably on an emergency code. While HMRC will eventually correct this, you might be waiting months unless you use their online services to submit a specific reclaim form.”
One lesser-known but effective way to avoid such pitfalls is to make a small initial withdrawal – as little as £1. This action forces the pension provider’s system to issue and update a tax code before a significant sum is withdrawn, thereby ensuring the correct rate is set from the outset. After confirming the accuracy of the new code, the pensioner can then withdraw any larger amount safe in the knowledge the appropriate tax will be deducted.
Financial commentators emphasise the importance of awareness and proactive management in pension decisions. Without such diligence, individuals risk unnecessary stress and avoidable financial loss. For anyone considering accessing all or part of their pension pot, it pays to research in advance and, if needed, seek independent financial advice.
The message is clear: while pension freedoms have given retirees much greater control over their savings, the accompanying responsibility for managing tax implications should not be underestimated. Taking a few extra minutes to double-check paperwork and tax codes could save months of frustration – and thousands of pounds lost unnecessarily to emergency taxation.