BBC Morning Live expert says pensions 40 per cent 'super tax' can be avoided with £1 tip

A BBC This Morning Live expert has said that a simple financial trick could prevent people avoid being hit with a ‘super tax’ by the HMRC over their pensions.

Appearing on the popular show with presenters Helen Skelton and Gethin Jones, Finance expert Laura Pomfret said people were being hit hard by being wrongly put on an emergency tax code.

The problem happens when people, perfectly legally, get access to their pensions lump sum early. In most cases it’s a one off sum to fund a purchase such as a home improvement, but HM Revenue and Customs assumes the person is taking out the same amount each month - which could result in paying thousands in unnecessary tax.

Ms Pomfret said that in the first three months of 2025 £44 million needed to be reclaimed by people over the age of 55 which had been overpaid to HMRC. She explained: “To put that in context, it’s around 15,000 people and an average of £2,900 each. This isn’t a little bit of tax that’s going off to HMRC. It’s a lot.

“This came about because, and you may remember, 10 years ago, we Had quite a big change in the pensions industry, and it was the pension freedoms and it was giving you literally that the freedom to access chunks of your cash, that was in your pension, take it out flexibly, but it does mean that people have been inadvertently over taxed with these withdrawals.”

The BBC’s Cost of Living correspondent Coletta Smith said: “Crucial thing is that the 1st 25% of whatever you take out is tax free. Anything above that, you get taxed on. And what happened was that HMRC didn’t change the rules that they had when this new freedom was introduced.

“So over the last decade, when people drew down some money from their pension. The tax man looks at that, say you take out £5,000 pounds one month, and that’s all you’re going to take out for that year. But the tax man assumes that that’s month one and that every month you’re going to be taking out £5,000 pounds, and that pushes you over the limit as a result.

“So what happens is you get given an emergency tax code, that means that you are taxed at a much higher rate as a result and you have to reclaim as a consequence, and that’s the process that people have been having to go through up until this point.”

Helen asked: “So that was a few months ago, where are we at now? Is it still happening?” Ms Pomfret explained: “So it has changed a little bit since then, so in April the government introduced um uh a better tax code process, which means that people taking regular income out of their pension get the correct tax code faster, ideally within a month rather than waiting until the end of the tax year. But it still doesn’t help those people making these one-off withdrawals.”

She gave an example of someone who was 60 and taking out a lump sum of £10,000 pounds, and is given an emergency tax code from HMRC. She said: “This means it’s treated as though he’s going to do £10,000 every single month not just a one-off. So he’s going to be taxed as though he’s taking out £120,000. She said he could be taxed as much as 40 per cent.”

Ms Pomfret said there were key ways of discovering if someone is paying emergency tax: “You need to know the tax code that you’re actually on. It would either have a W1, and M1 or an X on the end if it’s an emergency tax code.”

She said the HMRC would eventually correct it but it would mean them having it until the end of the tax year. People can apply for it back within 30 days with a special form.

Helen Skelton asked: “What’s this about £1 to protect your pension?” Ms Pomfret said: “If you think about Arthur’s situation he wants to withdraw a chunk, so what we want Arthur to do is withdraw a small amount first and let’s pick £1.

“So if he makes that as the first withdrawal rather than the £10,000. That will trigger the system and he will be able to see what the tax code is that the pension provider gives him and see whether it’s correct. If it’s not correct you’ve got that time to tweak it and get it correct. Once it’s correct you can go ahead and take the bigger sum out and know that it will be taxed correctly.”