HM Revenue and Customs (HMRC) has announced plans to improve tax code processing for new private pension recipients starting from April 2025, aiming to ensure people pay the correct amount of tax from the beginning of their pension payments.
The tax authority will implement automatic updates for customers on temporary tax codes who would benefit from being moved to a cumulative code.
This latest move from HMRC is designed to help pensioners avoid both overpayments and underpayments of tax, eliminating the need for adjustments at the end of the tax year.
Customers will not need to contact HMRC about these changes, as the process will be entirely automatic.
Going forward, HMRC will notify affected customers either by letter or through digital channels if they have opted for paperless communications via the HMRC app or online services.
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Private pensions could be taxed less under HMRC changes
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The tax authority has assured that pension providers will not need to alter their tax coding processes, as HMRC will handle all adjustments automatically as part of its services.
Providers will receive notifications when tax codes have been automatically adjusted for their customers.
The new system is expected to reduce the number of tax code error queries that pension providers receive.
Myron Jobson, a senior personal finance analyst at interactive investor, welcomed the change, calling it “a significant step forward in simplifying what can often be a confusing process”.
“For too long, pensioners have borne the brunt of systemic inefficiencies, with many unknowingly overpaying tax and waiting months for refunds,” he said.
Jobson added: “This change not only ensures that pensioners are taxed more accurately in real time but also reduces the financial and emotional stress of overpayment.”
The scale of the current tax code issues was highlighted by recent HMRC figures, which showed the tax authority processed refunds totalling £49,514,458 between October and December 2024.
This substantial sum in refunds over just three months demonstrates why the upcoming changes to tax code processing have become necessary. HMRC emphasised that this automatic tax code update system is part of their broader commitment to enhancing customer service experience.
The change aims to deliver immediate benefits to customers, ensuring they receive the correct pension payments more quickly. This improvement represents one component of HMRC’s wider initiative to streamline services for taxpayers.
Sir Steve Webb, a former pensions minister and partner at LCP, praised the tax authority’s latest move as a “victory in a 10-year campaign to end the scandal of over-taxed pensions”.
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He explained: “It is great news that, at long last, HMRC has listened to the voices of ordinary taxpayers and changed this scandalous system.
“For too long, hundreds of thousands of people have been overtaxed and had to jump through hoops to claim back their own money.
“This new system should mean that far more people are quickly moved on to the correct tax code and no longer end up with an overpayment of tax.
“The tax system is complex enough as it is, and this change should hopefully reduce the complications which pension savers face when they try to access their hard-earned cash.”
