Why a first pension withdrawal is often taxed too much, and how to get it back
A one-off withdrawal is usually taxed as if it would be repeated every month. HMRC has three forms for putting it right within the year, and which one applies depends on what is left in the pot.
At a glance
- A first taxable withdrawal from a pension is often taxed as if the same amount would be paid every month, so far too much tax can be taken.
- HMRC has three forms for reclaiming it within the tax year: P55, P53Z and P50Z. Which one applies depends on whether the pot has been emptied.
- If nothing is done, HMRC usually corrects the position after the tax year ends, which can mean a wait of many months.
It is one of the more unpleasant surprises of retirement. Someone takes a lump sum from a pension, perhaps to repair a roof or help a grandchild, and finds that a startling share of it has gone in tax. Often the tax taken is far more than they actually owe for the year. This is not a penalty and it is not final. It is a quirk of how tax is deducted from a one-off payment, and it can be reclaimed.
This article explains why it happens, how large the difference can be, and which HMRC form is used to get the money back.
Why the first withdrawal is over-taxed
When a pension provider pays out a taxable sum for the first time, it usually has no up-to-date tax code from HMRC for that payment. It therefore applies an emergency code on what is called a “month 1” basis. That means it gives the recipient one twelfth of the annual Personal Allowance and one twelfth of each tax band, as though the same payment would be made every month for the rest of the year.
For a regular monthly pension that works well enough. For a single large withdrawal, it is badly wrong: most of the payment falls outside the tiny monthly allowances and bands and is taxed at 40% or 45%, even if the person’s income for the whole year is well within the basic rate band.
The tax is worked out as if a one-off withdrawal would be repeated twelve times. Almost nobody’s withdrawal is.
Worked example · illustrative only
A £20,000 taxable withdrawal
Someone receives the full new State Pension and takes £20,000 of taxable money from a pension pot in 2026/27, on top of the tax-free part. They have no other income. Rates are those for England, Wales and Northern Ireland; the provider applies the emergency code on a month 1 basis.
- Tax deducted on a month 1 basis (approximate)
- £7,380
- Tax actually due for the year on the withdrawal
- £3,995
- Overpaid, reclaimable
- about £3,385
On the month 1 basis, about £1,048 is tax-free, the next £3,142 is taxed at 20%, the next £7,287 at 40% and the remaining £8,524 at 45%. Over the year, the State Pension uses all but £22.40 of the £12,570 Personal Allowance, so nearly all of the £20,000 is in fact taxed at 20%. The real figures depend on the code the provider uses and on other income.
The three forms, and which one to use
HMRC lists separate forms depending on what has happened to the pension. Using the wrong one can delay a refund. They can be completed online through GOV.UK, or printed and posted.
| Form | HMRC’s description | Typical situation |
|---|---|---|
| P55 | Claim back tax on a flexibly accessed pension overpayment | Part of the pot taken, money still left, no regular payments yet |
| P53Z | Claim a tax refund when you’ve flexibly accessed all of your pension | Whole pot taken, and other taxable income such as another pension or earnings |
| P50Z | Claim a tax refund if you’ve stopped work and flexibly accessed all of your pension | Whole pot taken, no longer working, no other taxable income apart from the State Pension |
| P53 | Claim a tax refund when you’ve taken a small pension lump sum | A small pot or trivial lump sum taken in one go |
Descriptions from GOV.UK’s list of printable forms. GOV.UK’s “Check how to claim a tax refund on your pension” tool confirms which applies.
After a claim, HMRC works out any repayment and pays it by Faster Payments into a bank account in the claimant’s name or a nominee’s. HMRC says it checks again at the end of the tax year and will be in touch if the amount was different.
What happens if no claim is made
Doing nothing does not mean losing the money. HMRC will usually reconcile the position after the tax year ends and issue a calculation showing any refund due. The difference is time: someone who took a withdrawal in May could wait well over a year for a refund that a P55 might have produced within weeks.
If regular withdrawals continue from the same pot, HMRC will normally send the provider a proper tax code, and the over-deduction is corrected gradually through later payments during the year.
Ways people reduce the problem
- Knowing it is coming. Many providers warn about emergency tax in their withdrawal paperwork. Budgeting on the amount actually paid, rather than the gross figure, avoids a shortfall while the refund is pending.
- Phasing larger withdrawals. Some people take a small first payment so that HMRC issues a tax code before a larger one is made. Others spread withdrawals across tax years so that less of the money falls into higher bands. The effect of timing on the tax actually due is shown in taking a quarter of a pension tax-free.
- Checking the tax code afterwards. A first withdrawal can trigger a new tax code on other pensions as well. Codes ending in M or N relate to the Marriage Allowance, explained in the Marriage Allowance many retired couples never claim.
Refunds come from HMRC, free of charge
Reclaiming tax on a pension withdrawal is done directly with HMRC and costs nothing. Be wary of firms that offer to reclaim it for a percentage, and of any text or email claiming a “tax rebate” that asks for bank or login details. HMRC does not send refund offers by text with a link to click.
Who this matters for, and what to check
- Anyone who has taken, or plans to take, a lump sum or one-off payment from a defined contribution pension.
- Anyone who has emptied a small pot and has nothing left in it to adjust future payments.
- Anyone whose net payment looked far smaller than expected: compare the tax shown on the provider’s statement with the tax due for the year as a whole.
- Anyone still deciding between routes: see annuity or drawdown, set out without the sales pitch.
The takeaway
Over-taxation of a first pension withdrawal is common, predictable and usually reversible. It comes from treating a one-off payment as if it would recur every month. HMRC’s P55, P53Z and P50Z forms exist precisely to put it right within the year; otherwise the correction follows after the year ends. Either way, the tax actually owed is decided by total income for the year, not by the figure deducted on the day.
Sources
- GOV.UK, Check how to claim a tax refund on your pension
- HMRC, Claim a tax refund on your pension by post. Forms P50Z, P53, P53Z and P55, and what happens after a claim
- GOV.UK, Emergency tax codes
- GOV.UK, Income Tax rates and Personal Allowances
General information
This article is private sponsored information from N&V Accounting OÜ, the publisher of Mo-saique (company details). It is not published by, and is not affiliated with, the Department for Work and Pensions, HM Revenue & Customs or GOV.UK. It is general information, not personal financial, pension or tax advice, and it does not recommend any product or provider.
Figures are official published rates for the year stated or clearly labelled illustrations; what any one person receives or pays depends on their own record and circumstances. This site takes no applications and charges no fees. Never give your National Insurance number, bank details or Government Gateway or GOV.UK One Login details to a website in response to an article. For your own position, use GOV.UK or contact the department concerned.
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