HMRC repaid nearly £50m to people who overpaid tax when they flexibly accessed their pensions in Q4 2024, the latest government Pension Schemes Newsletter has revealed, pushing the total repayments since 2015 to almost £1.4bn.

However, HMRC announced that it will be changing the system to improve how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset.

According to the update, HMRC repaid a total of £49,514,458 from 1 October 2024 to 31 December 2024, with an average reclaim of £3,389.

This marked a year-on-year increase, as HMRC repaid a total of £38m to people who overpaid tax when they flexibly accessed their pensions in Q4 2023.

Despite this, repayments for the year in total saw a slight fall, as HMRC repaid around £192.7m in 2024, while in 2023 it repaid more than £200m in overpaid pensions tax.

However, AJ Bell director of public policy, Tom Selby, warned that this is "likely only the tip of the iceberg, as it only captures those who fill in the relevant HMRC reclaim form".

"In reality lots of people, such as those on lower incomes who are less familiar with the self-assessment system, will not go through the official process of reclaiming the money they are owed," he explained.

The tax repayments on flexible withdrawals are necessary as HMRC applies an emergency 'month 1' tax code on the first withdrawal, which can lead to an initial over-taxation.

People reclaiming overpaid tax must fill in one of three forms, with the latest update revealing that HMRC processed a total of 14,612 forms during the period, including 8,523 P55 forms, 4,760 P53Z forms, and 1,329 P50Z forms.

However, HMRC confirmed that it will be overhauling this system to improve how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset.

"We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year," HMRC explained.

Whilst highlighted by HMRC as a "small change", LCP partner, Steve Webb, said that this felt like a "big breakthrough".

"It is great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system," he continued.

"For too long, hundreds of thousands of people have been overtaxed and had to jump through hoops to claim back their own money.

"This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax. The tax system is complex enough as it is, and this change should hopefully reduce the complications which pension savers face when they try to access their hard-earned cash”.

However, Selby argued that this won't help those people taking ad-hoc lump sums from their drawdown pot and still means the first payment for all will be overtaxed.

“It is simply unacceptable that, almost a decade on from the introduction of the pension freedoms, the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days," he added.

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