Starting in April 2025, HMRC will stop using emergency tax codes for people starting private pensions, addressing long-standing criticism about incorrect tax deductions. The change aims to ensure new pensioners are taxed accurately from the outset, reducing delays and overpayments.
Emergency tax codes often result in new pensioners being taxed incorrectly, leading to millions of pounds in overpayments. HMRC estimates that taxpayers owe over £200 million annually due to these errors. The updated system will replace temporary codes with cumulative ones more quickly, ensuring taxpayers receive the correct pension payments sooner without waiting for a year-end adjustment.
This update won’t affect those withdrawing tax-free pension drawdowns unless they split payments into a notional amount followed by the actual drawdown. Concerns remain that HMRC has not addressed issues with drawdown taxation, which caused £50m in overpayments in Q4 2024 alone. Over 14,000 reclaim forms were processed during that period, with average refunds of £3,389.
HMRC says taxpayers do not need to take action, as new tax codes will be issued automatically. Updates will be communicated digitally to those using HMRC’s app or online services or by letter.
While HMRC describes this change as a minor adjustment, it forms part of a broader push to improve customer service and tackle issues stemming from its legacy systems. However, critics argue that more comprehensive reforms are needed to address the ongoing problems with pension taxation.
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