State pensioners urged to withdraw £1 to avoid £3,160 tax | Personal Finance | Finance
State pensioners have been urged to use a simple £1 strategy to avoid overtaxation on their flexible pension withdrawals. Flexible-access drawdown allows Brits aged 55 or over to withdraw unlimited, flexible income or lump sums from their defined contribution pensions.
Most people typically take 25% of their pension tax-free while keeping the remainder invested, but pensioners can often overpay tax if they make a single withdrawal in a year above this tax-free limit. In the final quarter of last year alone, HM Revenue and Customs (HMRC) processed £46million in overtaxation claims. This often happens because, under current rules, HMRC assumes a one-off withdrawal will be repeated monthly.
So if you withdraw thousands of pounds in the first month and nothing for the rest of the year, HMRC could apply an emergency tax code, which will assume you withdraw that much consistently.
The Government should automatically adjust the tax code when people make multiple withdrawals during the tax year. Tom Selby, director of public policy at AJ Bell, said taking a nominal amount first, such as £1, would ensure the correct tax code is applied.
“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.”
HMRC changed its tax code process in April 2025, so people were moved from an emergency code more quickly. But Adam Cole, retirement specialist at wealth management firm Quilter, noted the typical refund now exceeds £3,160.
Mr Selby slammed HMRC for leaving the system unchanged since 2015 and said there was “no sign of a retreat” in the number of pension overtaxation claims it was processing.
“It is now over a decade since pension freedoms and flexible pension withdrawals were introduced, and HMRC is yet to address one of the enduring flaws in its approach to taxing those who choose to flexibly access their pension pots,” he said.
