UK鈥檚 HM Revenue and Customs (HMRC) is set to implement changes to tax code processing for new private pension recipients from April 2025.
This initiative aims to ensure that individuals pay the correct tax amount from the start of their pension payments, addressing the issue of overtaxed pensions.
In a statement, HMRC said: 鈥淔rom April 2025 we are improving 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.鈥�
Since the introduction of pension freedoms in 2015, savers with defined contribution pensions could withdraw savings in chunks.
However, HMRC applied ’emergency tax codes’ to these withdrawals, often leading to overtaxation.
Consequently, individuals had to claim refunds, with 拢49.5m repaid by HMRC between 1 October 2024 and 31 December 2024.
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By GlobalDataFormer Pensions Minister and partner at LCP Steve Webb, as by FT Adviser, highlighted the impact of the current system, stating that more than 470,000 claims have been made for refunds totalling 拢1.37bn since the system was introduced.聽
The new measures aim to prevent both overpayments and underpayments of tax, eliminating the need for end-of-year adjustments.
鈥淲e will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code 鈥� this means they will avoid an overpayment or underpayment at the end of the year,鈥� the HMRC added.
Customers will not need to contact HMRC regarding these changes, as the process will be automatic.
Affected individuals will be notified via letter or digital channels, depending on their communication preferences.
HMRC has confirmed that pension providers will not need to modify their tax coding processes.
Webb added: 鈥淚t is great news that at long last HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system. For too long, hundreds of thousands of people have been overtaxed and had to jump through hoops to claim back their own money.鈥�
