Scott Kingsley, Senior Wealth Advisor
Markets tend to get the attention, while taxes rarely do. Yet since 2015, nearly £1.6bn has been reclaimed by individuals who overpaid tax on pensions when accessing their funds.
Indeed, HMRC confirmed that more than £44m was returned in the first quarter of 2026 alone. In that same period, almost 14,000 reclaim forms were processed, with an average repayment of just over £3,000.
That isn’t a one-off issue or a statistical anomaly - it’s something that happens repeatedly, and it raises a fairly straightforward question. If that much has been reclaimed, how much has simply gone unnoticed?
Most people assume that when tax is deducted, it’s correct. The system feels automatic and final, and once a number appears on a statement or payslip, it tends to be accepted without much thought.
In many areas, that assumption holds up reasonably well, but when it comes to tax on pensions, it often doesn’t, and that isn’t because something has gone wrong, but because of how the system is designed to operate.
The issue largely comes down to how withdrawals are treated, particularly the first one in a tax year.
When you access your pension flexibly, HMRC will usually apply what’s known as a “month 1” tax code. In simple terms, this assumes that whatever you withdraw will continue at the same level each month for the rest of the year.
So if you take £20,000 as a one-off, the system may treat it as if you were earning £20,000 every month, leading to a fairly predictable outcome. Your annual income is overestimated, a higher level of tax on pensions is applied upfront, and the deduction can feel disproportionately large relative to what you expected.
For those taking regular income, this tends to correct itself over time as more data feeds into the system, but for those making a single withdrawal, it often doesn’t, which is where the reclaim process comes in.
At that point, you can either:
In both cases, the result is the same - money that didn’t need to be paid is returned later. From a technical perspective, nothing has gone wrong, as the system has simply followed its own logic. However, from a practical perspective, it introduces unnecessary friction (and potential cash flow issues) into what many assume should be a straightforward process.
The average reclaim of around £3,000 is not insignificant, particularly when it represents money that didn’t need to leave your account in the first place.
This is where the conversation moves beyond mechanics and into behaviour. Most people don’t actively check the tax on pensions they pay because, when tax is deducted through PAYE, it tends to be assumed that it’s already been calculated correctly. There’s a degree of trust built into that process.
That trust isn’t entirely misplaced, but it can be incomplete.
The current system is designed to process millions of transactions consistently and efficiently. But it isn’t designed to perfectly reflect individual circumstances at the exact point a withdrawal is made, and that distinction matters more than it might first appear.
The £1.6bn reclaimed suggests that a significant number of people have, at some point, paid too much tax on pensions and then taken steps to recover it. Importantly, that figure reflects only those who actively reclaimed the overpaid tax, so it doesn’t show how many people didn’t notice, didn’t question it, or simply assumed it would correct itself over time.
In practice, responses tend to vary. Some people notice immediately and act, while others deal with it later or assume it will resolve on its own. Many won’t notice at all.
That variation comes down to engagement: tax that is deducted automatically tends to feel final, even when, in situations like this, it is often just the starting point rather than the finished position.
The underlying pattern behind most overpayments isn’t particularly complex, and it rarely comes down to obscure rules or technical misunderstandings. Instead, it’s usually the result of how and when decisions are made.
Certain situations tend to increase the likelihood of overpaying tax on pensions, particularly where the structure is lacking:
Individually, none of these is unusual, but when combined, they can result in a higher tax on pensions than is necessary.
For expats and internationally mobile individuals, the situation can become more complex. It’s not uncommon to have income earned in one country, pensions held in another, and expenditure spread across multiple currencies.
Add in different tax years, reporting requirements and exchange rate movements, and the overall picture can become fragmented quite quickly.
In that environment, decisions are often made in isolation rather than as part of a joined-up plan.
A withdrawal that appears reasonable in one context may not be when viewed across the full financial position, which is where overpayment becomes more likely - not because the rules are unclear, but because the full picture isn’t always considered.
Avoiding unnecessary tax on pensions doesn’t require anything particularly complex. It benefits from a more deliberate approach, particularly when withdrawals are planned rather than taken reactively.
A few practical steps tend to make a noticeable difference:
For expats, the emphasis shifts slightly towards coordination, as aligning pension withdrawals with broader cross-border tax planning becomes more important. Decisions made in one jurisdiction need to be considered in the context of the wider financial picture.
None of this is about trying to outmanoeuvre the system or apply complex strategies. It’s simply about avoiding default outcomes where they don’t serve your interests.
Given how well documented this issue is, it’s reasonable to ask why it continues to occur. The answer sits partly in how the system is structured, and partly in how people interact with it.
From an administrative perspective, applying an emergency tax code upfront ensures that sufficient tax is collected early, reducing the risk of underpayment. It’s a consistent and scalable approach, even if it isn’t always precise.
Adjusting perfectly for every individual scenario in real time would introduce complexity and delay, so a more practical approach is used: apply a standard approach first and adjust later if required. That works well at scale, but it doesn’t always produce the most accurate outcome at the point of withdrawal.
On the behavioural side, pension decisions are often infrequent and spaced out, so they don’t always receive the same level of attention as ongoing financial matters, such as investments or income. There’s also a tendency to view tax as something that simply happens, rather than something that can be influenced through structure and timing.
When those two factors come together - standardised processes and relatively low engagement- the outcome is fairly predictable. It helps explain why tax overpayments on pensions persist even when the underlying mechanics are well understood.
More than a decade after pension freedoms were introduced, the issue remains largely unchanged, which suggests it is structural rather than temporary.
While this example focuses on pensions, the underlying lesson is more general. Financial systems are designed to operate efficiently and consistently, prioritising process over personalisation, and they aren’t built to optimise outcomes for every individual scenario.
That’s where planning becomes important.
Paying tax on pensions is part of the process, but overpaying and reclaiming it later doesn’t have to be. The £1.6bn figure serves as a reminder of the gap that can exist between default outcomes and optimal ones.
For most people, closing that gap doesn’t require complex solutions or significant changes; it simply requires:
Small adjustments, particularly around timing and coordination, can have a disproportionate impact, and over time, those incremental improvements tend to matter more than any single decision.
If you’d like to sense-check how your pension withdrawals are structured, particularly across different income sources or jurisdictions, we’re always happy to talk it through. A short conversation can often highlight whether your current approach to tax on pensions is working as intended, or whether a few small adjustments could improve the overall outcome.