HMRC repaid a total of £38m to people who overpaid tax when they flexibly accessed their pensions in Q4 2023, pushing the total repayments for the year up to £204.8m, the latest government Pension Schemes Newsletter has revealed.

According to the update, HMRC repaid a total of £38,784,733 from 1 October 2023 to 31 December 2023, meaning that nearly £1.2bn has now been reclaimed by people overtaxed on pension withdrawals since 2015.

Whilst the repayments in Q4 marked a fall on the £61.3m repaid in the previous quarter, and a year-on-year fall from the £45m repaid in Q4 2022, total repayments for the year increased from around £134m in 2022 to £204.8m in 2023.

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 12,059 forms during the period, including 7,307 P55 forms, 3,738 P53Z forms, and 1,014 P50Z forms.

However, AJ Bell director of public policy, Tom Selby, warned that "depressingly", the true over-taxation number will likely be substantially higher.

"In particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed," he explained. "As a result, they will be reliant on HMRC putting their affairs in order."

Selby argued that it is "simply unacceptable that 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".

Industry experts have also previously suggested that changes should be considered to avoid the risk of over-taxation and reduce the complexity facing savers, with concerns around the cost-of-living crisis creating an added sense of urgency.

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