How do you reclaim pension emergency tax on a lump sum withdrawal in the UK?

Full answer

When you first access your pension pot under the pension freedom rules, your pension provider does not always hold a current tax code for you. In the absence of a current tax code, HMRC requires providers to use the emergency tax basis -- specifically the Month 1 basis using Code 1257L/M1. How emergency tax works Under the Month 1 (non-cumulative) basis, the provider treats your withdrawal as if it were 1/12 of an annualised amount. So if you withdraw GBP 20,000 in one go, the provider calculates tax as if you earn GBP 240,000/year, resulting in tax far above what you actually owe for the year. The overpaid tax can be substantial -- tens of thousands of pounds in some cases. Which form to use for a refund You do not have to wait until the end of the tax year to reclaim. HMRC provides three in-year reclaim forms: -- P55: Use this if you have taken a partial withdrawal (accessed some but not all of your pension fund) and you are still receiving other taxable income (employment or pension). -- P50Z: Use this if you have fully encashed your pension pot, you have no other income in the current tax year, and you have not worked in the current tax year. -- P53Z: Use this if you have taken your entire pension pot as a single trivial commutation or small pots payment and are not working or receiving another pension. HMRC typically processes refund claims within 30 working days. You can also submit the forms online via GOV.UK or by post. Alternative: wait for self-assessment If you do not wish to complete a reclaim form, any overpayment will be corrected through your Self Assessment tax return after the end of the tax year. HMRC will refund the difference automatically (or offset it against any other tax owed). Avoiding emergency tax on future withdrawals Once you have taken a first withdrawal and your provider holds a correct cumulative tax code, subsequent withdrawals in the same year should be taxed correctly. You can also provide your pension provider with a P45 (from a recent employment that has ended) to establish a cumulative code from the start. Multiple small pension pots If you have several pension pots, each provider will apply emergency tax unless they hold a current code. If taking multiple pots in the same year, consider withdrawing from them sequentially and reclaiming after each, or use the same provider where possible.

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