HMRC to End Emergency Taxing of Pension Withdrawals
HM Revenue and Customs (HMRC) is set to abolish the controversial practice of emergency taxing retirees on their pension withdrawals, marking a significant victory for campaigners who have long criticized the "arcane" system. This change, effective from April 2025, promises to ease the financial burden for pensioners who have been caught in this tax trap since the introduction of pension freedoms a decade ago.
?The issue traces back to 2015 when then-Chancellor George Osborne revolutionized pension access by introducing pension freedoms. This policy allowed individuals to withdraw their pension savings flexibly—either in chunks or all at once—instead of mandating the purchase of an annuity to provide a guaranteed income for life. However, HMRC’s method of taxing these withdrawals created unforeseen complications.
When pensioners made their first withdrawal, HMRC applied an emergency tax code based on a "Month 1" calculation. This approach assumed the withdrawal would be repeated every month, dividing annual tax allowances by 12 and often leading to substantial overpayments. As a result, retirees were hit with inflated tax bills, some exceeding ￡54,000, even though the withdrawals were often one-time lump sums.