HMRC Pension Tax Code Rule Change | What You Need to Know Before April 2025?

Millions of UK pensioners have been affected by a long-standing HMRC tax code error, which has resulted in them paying more tax than necessary on their pension withdrawals.

This costly mistake stems from emergency tax codes applied to pension withdrawals, often leading to overpayments that required pensioners to manually reclaim their money.

However, from April 2025, HMRC is set to introduce a major reform that will replace emergency tax codes with regular tax codes, ensuring that pensioners are taxed correctly in real-time. This change aims to prevent overpayments and streamline the taxation process for those accessing their pensions.

In this guide, we will break down the upcoming HMRC pension tax code rule change, how it impacts pensioners, and what steps individuals should take before April 2025.

What Is an HMRC Pension Tax Code and How Does It Affect You?

An HMRC pension tax code determines how much tax is deducted from pension income under the Pay As You Earn (PAYE) system. Every UK taxpayer has a tax code assigned by HMRC, which ensures the correct amount of tax is deducted based on their income level and personal circumstances.

Pensioners, like employees, have tax codes that determine how much tax is applied to their pension payments.

The standard tax code for most UK pensioners is 1257L, which allows them to earn up to £12,570 per year tax-free.

However, pensioners with multiple sources of income, such as a workplace pension, state pension, or additional investments, may be assigned a different tax code. If an incorrect tax code is applied, pensioners could end up paying too much or too little tax on their withdrawals.

A major issue arises when emergency tax codes are applied to pension withdrawals. Emergency tax codes, such as BR (Basic Rate), OT (Zero Personal Allowance), and D0 (Higher Rate Tax Only), often result in pensioners overpaying tax.

These codes are usually assigned when HMRC does not have enough information about an individual’s income, leading to excessive deductions from lump-sum withdrawals.

What Are the Pension Tax Code Rule Changes Coming in April 2025?

One of the most significant tax changes coming in April 2025 is the elimination of emergency tax codes for pension withdrawals.

This reform aims to ensure that pensioners are taxed correctly at the time of withdrawal, reducing the need for tax refunds and simplifying the overall process.

Previously, HMRC applied an emergency tax code to one-time lump sum withdrawals, treating them as if they were the first in a series of monthly payments throughout the tax year.

This often resulted in excessive tax deductions, forcing pensioners to claim back their overpaid tax later.

From April 2025, this system will be replaced with an improved approach:

• Regular tax codes will be applied immediately when pensioners withdraw money.
• Tax deductions will be more accurate, reducing overpayments and the need for refunds.
• HMRC will automatically update pensioners’ tax codes and notify them via letter or through the HMRC app if they have opted for paperless communication.

This reform is expected to significantly reduce administrative burdens on pensioners and ensure they receive the correct amount of pension income after tax deductions.

What Is the HMRC Pension Tax Code Error, and Could You Be Due a Refund?

The pension tax code error originated from HMRC’s use of emergency tax codes on pension withdrawals since April 2015, when pension freedoms were introduced.

These freedoms allowed pensioners over the age of 55 to withdraw money flexibly from their pension pots rather than being required to purchase an annuity.

When individuals withdrew a taxable lump sum from their pension, HMRC applied an emergency tax code, incorrectly assuming the withdrawal would be repeated each month. As a result, millions of pensioners overpaid tax on their withdrawals and had to manually reclaim their money.

HMRC has already refunded approximately £1 billion in overpaid pension tax to affected individuals since the rule change in 2015. Many pensioners remain unaware that they could be eligible for a refund.

You could be due a refund if:

• You have taken a taxable lump sum from your pension for the first time.
• You withdrew your entire pension pot at once.
• You noticed a large tax deduction from your pension payment.
• Your pension provider applied an emergency tax code to your withdrawal.

How Does Emergency Tax on Pensions Work, and How Can You Avoid It?

Emergency tax is applied when HMRC does not have sufficient details about a taxpayer’s total income. This often happens when individuals withdraw pension funds for the first time or make an unusual withdrawal amount.

Instead of taxing only the relevant amount, HMRC assumes that the withdrawal will be repeated every month for the entire tax year. As a result, the tax calculation is artificially inflated, leading to overpayment.

For example:

To avoid emergency tax deductions, pensioners can:

• Contact HMRC before making a withdrawal to ensure the correct tax code is applied.
• Check their pension tax code on HMRC’s online portal.
• If emergency tax is deducted, file a refund claim using the correct HMRC form.

What’s Changing with the State Pension in 2025?

Alongside the pension tax code changes, the state pension system is also undergoing updates in 2025.

The UK government regularly adjusts the state pension through mechanisms like the triple lock, which ensures that pensions increase in line with inflation, wage growth, or 2.5% – whichever is highest.

Other potential state pension changes in 2025 include:

• State pension age increases – The state pension age is set to rise from 66 to 67 between 2026 and 2028, and further increases are being considered.
• Tax implications – Any increase in state pension payments may affect overall income tax liabilities for pensioners.
• Adjustments to pension entitlements – Potential reforms may affect eligibility criteria for new retirees.

What Are the New Pension Dashboards, and How Will They Help You?

In April 2025, pensioners will gain access to a new online pension dashboard, allowing them to track and manage all their pensions in one place. This initiative aims to improve financial transparency and help retirees make better decisions about their pension savings.

Key features of the pension dashboards:

• A single platform to view all pension savings, including workplace, private, and state pensions.
• Real-time updates on estimated retirement income.
• A tool to track lost pensions from past employment.

The new pension dashboards will help individuals plan their retirement finances more effectively by offering a clear overview of their savings and expected income.

From April 2025, Emergency Tax Codes Will Be Replaced with Regular Ones

A significant change in the UK pension tax system is set to take effect in April 2025, as HMRC will replace emergency tax codes with regular tax codes for pension withdrawals.

This move aims to ensure that the correct amount of tax is deducted in real-time, preventing unnecessary overpayments and simplifying the taxation process for pensioners.

For years, HMRC’s use of emergency tax codes on pension withdrawals has led to widespread overpayments. These codes were applied when individuals withdrew money from their pension pots, often assuming that the withdrawal would be a monthly recurring payment rather than a one-time lump sum.

As a result, many pensioners ended up paying significantly more tax than necessary, requiring them to reclaim overpaid amounts through HMRC refund forms.

With the introduction of this new tax rule in April 2025, pensioners withdrawing lump sums or starting ongoing pension payments will be assigned a regular tax code from the start. This means:

• More accurate tax deductions will be made at the time of withdrawal.
• Pensioners won’t have to manually reclaim overpaid tax as frequently.
• Those receiving regular pension payments will no longer be placed on a temporary tax code.
• Automatic tax code updates will ensure pensioners pay the right tax without needing to contact HMRC.

How Will the New System Work?

According to an HMRC newsletter confirming this change, the new system will introduce cumulative tax codes, which consider a person’s total taxable income rather than treating each pension withdrawal as an isolated event.

HMRC explained:

“We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year.”

Additionally, those receiving ongoing pension payments for the first time will also benefit from this update. HMRC reassured pensioners that there is no need to contact them—the tax code update will happen automatically.

Once changed, pensioners will be notified via letter or, if they have opted for digital communication, through the HMRC app or online portal.

What This Means for Pensioners

For pensioners, this is a positive change that will:

• Reduce the risk of overpaying tax on pension withdrawals.
• Eliminate the need to submit manual tax refund claims to recover overpaid amounts.
• Ensure tax calculations reflect a pensioner’s full income rather than assuming repeated monthly withdrawals.
• Streamline HMRC’s pension taxation process, making it more efficient and accurate.

This reform is part of a broader effort to modernise pension taxation, making it fairer and less cumbersome for retirees. Pensioners are encouraged to monitor their tax codes and review their pension withdrawals carefully to ensure the transition to the new system goes smoothly.

What Should You Do Before the April 2025 Rule Change?

With these major changes approaching, pensioners should take proactive steps to ensure they are financially prepared:

• Check Your Pension Tax Code: Ensure that your tax code is accurate to avoid overpayment.
• Claim Overpaid Pension Tax: Use the correct HMRC form to reclaim any excess tax deducted.
  • P50Z: If you emptied your pension and have no other taxable income.
  • P53Z: If you emptied your pension but have other taxable income.
  • P55: If you withdrew part of your pension and paid emergency tax.
• Stay Informed About State Pension Changes: Monitor government announcements on pension age increases and tax adjustments.
• Sign Up for Pension Dashboards: Register for the new online pension tracking system once available.

By preparing now, pensioners can take full advantage of the HMRC pension tax code rule change and ensure their retirement income is taxed correctly without unnecessary deductions.

Conclusion

The HMRC pension tax code rule change coming in April 2025 is a major step toward fairer taxation for pensioners. By eliminating emergency tax codes and implementing regular tax codes, pensioners will no longer face unnecessary overpayments or the hassle of reclaiming tax.

With additional changes to state pensions and the introduction of pension dashboards, retirees will have better tools to manage their finances. To avoid tax issues, pensioners should review their tax codes, check for overpayments, and stay informed about upcoming reforms.

FAQs

How do I check if my pension tax code is correct?

You can check your pension tax code on your payslip, HMRC online account, or by calling HMRC.

Will my state pension be taxed differently after April 2025?

There are no direct changes to state pension taxation, but any increase in pension income could affect your overall tax liability.

How do I claim a refund for overpaid pension tax?

You need to complete either P50Z, P53Z, or P55 forms depending on your situation.

What is the new pension dashboard, and how can I access it?

The pension dashboard will be available online from April 2025 and will provide a centralised view of all pension savings.

Will the HMRC tax code error affect all pensioners?

No, it primarily affects those who have taken lump sum withdrawals from their pensions since 2015.

Can I change my pension tax code before April 2025?

Yes, you can contact HMRC to update your tax code if you believe it is incorrect.

Where can I get advice on pension tax changes?

You can visit Gov.uk, consult with a financial advisor, or contact HMRC directly.