The £1 pension trick that could save you thousands on your tax bill
A CLEVER £1 pension trick could stop you from losing thousands in emergency tax when withdrawing from your pension.
Across the UK, many over-55s are at risk of overpaying tax when they take out lump sums from their pensions.
In just the first three months of 2025, pensioners reclaimed a staggering £44 million in overpaid tax, according to HMRC.
That’s an average of nearly £3,000 per person.
This happens because when people take out money from their pension for the first time, HMRC doesn’t always have an accurate tax code for them.
So instead, it applies an emergency tax, assuming the amount withdrawn will be repeated every month for the rest of the year.
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The result? You can end up paying much more tax than you actually owe.
For example, someone taking out £20,000 might be taxed over £7,000, when they should really only pay around £1,500.
The extra money can be claimed back, but it often takes months and requires filling in complicated forms.
That’s where the £1 pension trick comes in.
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By withdrawing a small amount first, as little as £1 in some cases – HMRC is prompted to issue an up-to-date tax code.
Once that code is in place, any further withdrawals are taxed correctly from the start.
Pensions expert Clare Moffat, from Royal London, told the Express that the exact amount needed varies depending on the pension provider.
“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 said.
Some providers allow £1 withdrawals online, but others may require a paper form.
It’s worth checking in advance to avoid delays or confusion.
David Gibb, a chartered financial planner, warned that this emergency tax is down to a glitch in the PAYE system.
“It’s a hangover from how regular wages are taxed.
"But for one-off pension withdrawals, it doesn’t make sense – and savers lose out.”
The trick isn’t perfect. In some cases, even with a tax code, emergency tax may still be applied.
But it can significantly reduce how much you overpay and the stress of claiming it back later.
If you’re planning to take out a lump sum for a big purchase, like a new kitchen, home repairs or a holiday, knowing this trick could keep more cash in your pocket.
However, experts also warn to think carefully before dipping into your pension early.
Withdrawing taxable income could reduce your pension pot and even trigger the Money Purchase Annual Allowance (MPAA), limiting how much you can pay back in later, from £60,000 a year to just £10,000.
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This could be a big deal for people in their 50s and early 60s who are still working and putting money into their pensions.
It’s also important to remember that once you take money from your pension, it may affect other benefits or entitlements, so it's worth getting advice.
