The cheeky £1 pension hack that could save you a fortune in tax

By HOAR Team 17 May, 2025 6 mins read 120 Views

I nearly choked on my tea when my dad told me how much emergency tax he'd paid on his pension withdrawal last year. Poor bloke ended up waiting THREE MONTHS to get his own money back from HMRC. "Never again," he muttered, showing me the refund letter.

That's when I started digging into this whole pension tax mess. And boy, what I found was eye-opening.

Turns out thousands of over-55s across Britain are getting absolutely hammered by emergency tax when they take lump sums from their pensions. We're not talking small change either.

£44 million nicked by HMRC (then slowly given back)

In just the first quarter of 2025, pensioners had to reclaim a mind-boggling £44 million in overpaid tax. That works out at about £3,000 per person! Imagine having three grand of your own money held hostage for months. No thanks.

The problem? When you withdraw from your pension pot for the first time, HMRC doesn't have an accurate tax code for you. So they panic and slap on an emergency tax rate that assumes you'll be taking that same amount EVERY SINGLE MONTH for the rest of teh year.

Absolutely bonkers when you think about it.

The £20k withdrawal that becomes a tax nightmare

Let's say you need £20,000 for a new kitchen. Instead of paying the correct tax of around £1,500, you could end up forking out more than £7,000 to the taxman! You'll get it back eventually... but only after filling in complicated forms and waiting ages.

Listen. I've seen what this does to people. My neighbour waited 5 months for her refund last year. Five. Months.

Enter the £1 trick (yes, seriously)

This is where things get interesting. There's a brilliantly simple workaround that pension experts have been quietly sharing: make a tiny withdrawal first.

By taking out as little as £1 (yes, a single quid), you force HMRC to issue you a proper tax code. Once that's in place, your main withdrawal gets taxed correctly from the start.

Clare Moffat from Royal London told the Express that the exact amount can vary between providers. "It could be £1, £50 or £100 – but the idea is to make a small withdrawal first to get a tax code sorted before taking a large sum," she explained.

Will your pension company play ball?

I spent yesterday afternoon calling different pension providers about this. Results were... mixed.

Some let you make these tiny withdrawals online with no fuss. Others insist on paper forms (welcome to 1995!) and might look at you like you've grown a second head when you ask to withdraw a pound.

Worth checking with yours before you need the money. Trust me, you don't want to be sorting this out when you're in a rush to pay for something important.

The PAYE system is broken (but we knew that)

David Gibb, a chartered financial planner, didn't mince words when explaining why this happens. It's basically "a hangover from how regular wages are taxed," he said.

For monthly salaries, the system makes sense. For one-off pension withdrawals? It's completely inappropriate adn leaves savers out of pocket.

The whole thing feels like trying to hammer a square peg into a round hole. And guess who suffers? Not HMRC, that's for sure.

Not perfect, but better than nothing

I should point out that even with this trick, you might still face some emergency tax in certain situations. But it'll likely be much less painful than going in blind.

If you're planning to take money out for home improvements, a holiday, or helping the grandkids, this little hack could save you thousands in upfront tax and months of frustration.

Just be careful.

Think twice before raiding the pension piggy bank

While we're on the subject, financial advisers I spoke to were keen to emphasize that dipping into your pension early isn't always the smartest move.

Taking taxable income could trigger something called the Money Purchase Annual Allowance (MPAA), which slashes how much you can pay back in later – from £60,000 a year to just £10,000.

That could be devastating if you're in your 50s or early 60s and still working. One adviser told me about a client who triggered this accidentally back in 2018 and is still kicking himself.

Plus, pension withdrawals might affect other benefits you're entitled to. Worth getting proper advice before making any big decisions.

But if you're determined to take that money out? Remember the £1 trick. Your future self (and blood pressure) will thank you.

Frequently Asked Questions

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To start saving for retirement, begin by establishing clear retirement goals and determining how much you need to save. Contribute to employer-sponsored retirement plans, such as a 401(k), and consider opening an Individual Retirement Account (IRA). Regular contributions and taking advantage of compounding interest can significantly boost your retirement savings over time.

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A budget deficit occurs when a government's expenditures exceed its revenues over a specific period, usually a fiscal year. This can lead to increased borrowing and national debt if not addressed through spending cuts or revenue increases.

Statistics

According to a survey by the Financial Industry Regulatory Authority (FINRA), about 66% of Americans could not correctly answer four basic financial literacy questions.
The average return on investment for the S&P 500 over the past 90 years is about 10% per annum.
According to the Federal Reserve, approximately 39% of Americans do not have enough savings to cover a $400 emergency expense.
A study by the National Endowment for Financial Education found that 60% of Americans do not have a budget.
Research by the National Bureau of Economic Research found that individuals who receive financial education are 25% more likely to save than those who do not.
According to the Bureau of Labor Statistics, the average American spends about $1,500 per year on coffee.
As of 2021, the median household income in the U.S. was approximately $67,521, according to the U.S. Census Bureau.
In 2020, the average retirement savings for Americans aged 60 to 69 was approximately $195,000, according to Fidelity.

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How To

How To Set Financial Goals That Stick

Setting financial goals that stick begins with defining what you want to achieve, whether it’s saving for a home, paying off debt, or building retirement savings. Use the SMART criteria—Specific, Measurable, Achievable, Relevant, Time-bound—to structure your goals effectively. Write down your goals and break them into smaller, actionable steps to make them less overwhelming. Establish a timeline for each goal and regularly review your progress to stay motivated. Adjust your goals as necessary to reflect changes in your financial situation or priorities, ensuring they remain relevant and attainable over time.

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