HMRC has refunded an astounding £42million in overpaid tax on flexible pension withdrawals in the first three months of 2024.

According to the newly released figures, this takes the total tax repayments for the previous tax year (2023/24) to over £198million, marking a record amount for any one tax year.

In total, over £1.2billion has been repaid by HMRC in overpaid tax on flexible pension withdrawals.

The overpayments are thought to be due to “an oddity” within the PAYE system which means they are placed on an emergency tax code when they first withdraw from their pension pot.

Experts are calling for an overhaul of the “archaic” system that currently presents a “significant” hurdle for those who need access to their cash quickly.

Ian Cook, chartered financial planner at Quilter commented: “Pension tax overpayment refunds remain incredibly high, with £42,003,943 repaid in the first quarter of 2024.”

Mr Cook noted that, while the figure is lower than that of Q1 2023, which might indicate that individuals were withdrawing larger sums from their pensions a year ago when the impact of the cost-of-living crisis was more pronounced, it still represents a substantial sum of money.

This is because it stems from the incorrect assessment of tax on pension income

He continued: “In Q1 2024, the average tax refund per saver was £3,167.

"More than 13,000 claim forms were processed, and those needing access to their funds are faced with an archaic system that over-taxes them and leaves them waiting unnecessarily before they can access the full amount they are owed.

“For those who need to access their funds quickly, this can present a significant hurdle.”

He added: “The system is desperately in need of an overhaul as, at present, the process is leaving people facing unnecessary emergency tax and adding additional strain at a time when many are still struggling with the cost of living.”

John Chew, pension, tax and estate planning specialist at Canada Life said: “Almost a decade on from the introduction of the pension freedoms and the latest HMRC update shows the tax system continues to catch people out.

“Although the overpaid tax on pension withdrawals can be reclaimed using one of the various forms available, the data shows record amounts of tax continue to be overpaid.

“There must be a better way of managing these withdrawals, especially if people are targeting a specific reason to use the money and find themselves short due to emergency tax being applied.”

While waiting for the tax system to catch up with the freedoms, Mr Chew said “a good tip” for people making a pension withdrawal for the first time is to request a small withdrawal of around £100.

He explained: “That will generate a tax code from HMRC, which the pension provider will apply to any subsequent withdrawals.

“That will result in the tax being taken at source being far more accurate in many more cases, not only reducing the burden of paperwork but equally importantly the customer receiving a more accurate withdrawal in the first place.

“It’s also worth noting that any change in tax position during the course of the year, resulting in a new tax code being issued by HMRC, should also be shared with your pension provider as a matter of course.

“This will help identify any differences in the tax being applied and allow for earlier intervention if required.”