The Simple £1 Pension Trick That Could Save You Thousands in Emergency Tax

During the first three months of 2025, HMRC refunded over £44 million in overpaid tax to more than 15,000 pension savers. Each person reclaimed an average of £2,881. In some cases, individual claims were in excess of £10,000.

This isn’t the result of complex tax avoidance or errors, it’s caused by a little-known technicality in how pension withdrawals are initially taxed.

Specifically, when you take flexible income from your pension for the first time, HMRC doesn’t always apply your normal tax code. Instead, it often defaults to an emergency code, which can result in a significantly inflated tax bill.

In this insight, Oscar Hjalmas, Chartered Financial Adviser and CEO of Baggette + Co Wealth Management, explains how a simple, proactive step, what’s become known as the £1 pension trick, could help you avoid being unfairly taxed the next time you access your pension.

It’s worth stressing that the £1 pension trick is not a form of tax avoidance. You still pay the correct amount of income tax, based on your actual income, not an inflated emergency estimate. It’s simply a practical way to ensure you’re taxed fairly from the start. Everyone’s financial circumstances are different, which is why we always recommend speaking to a genuinely independent financial adviser before making any decisions about pension withdrawals.

At Baggette + Co, we regularly help clients across Poole, Bournemouth and Dorset structure their retirement income tax-efficiently and with confidence. And time and again, we’ve seen how a small bit of financial planning, particularly around first withdrawals, can make a surprisingly big difference.

Why Emergency Tax Is Applied to Pension Withdrawals

Since the introduction of pension freedoms in 2015, people aged 55 or over (rising to 57 from April 2028) have had greater flexibility in how and when they access their defined contribution pensions. You can usually take up to 25% of your pension pot tax-free, with the remainder taxed as income.

However, when you make your first withdrawal beyond the tax-free portion, HMRC may not yet have provided your pension provider with an accurate, personalised tax code. So, instead, a default “Month One” emergency tax code is used.

The emergency code means the tax is calculated using 1/12th of the standard personal allowance and 1/12th of the basic and higher rate tax bands, so anything above that is subject to additional rate tax. It assumes the amount you’ve withdrawn is part of a regular monthly income and applies income tax as though you’ll take the same amount every month for the rest of the year.

The result is that a one-off lump sum withdrawal, something completely within your rights under pension freedoms, can be taxed at much higher rates than necessary. That’s because you’re not being assessed against your full annual personal allowance and tax bands, but against a monthly slice of them.

Let’s look at a simple example.

If you’re not earning any other income and decide to withdraw £10,000 from your pension in one go, that amount would ordinarily fall entirely within your personal allowance and be tax-free. But if an emergency tax code is applied, it could be taxed as if you’re receiving £120,000 a year.

In that situation, you might see over £3,000 in tax deducted unnecessarily.

While you can reclaim the overpaid amount, doing so takes time, paperwork, and often a fair bit of patience. You’ll need to submit a form, usually P55, P50Z or P53Z, depending on how the withdrawal was made and your current circumstances. HMRC’s guidance on reclaiming tax from pension withdrawals can be found here: https://www.gov.uk/claim-tax-refund/you-get-a-pension.

Most people receive their refunds within a month, but some experience delays. And for those who were counting on that money for something urgent, the wait can be both frustrating and disruptive.

In 2024 alone, more than 2,300 people reclaimed over £10,000 in overpaid tax, according to a Freedom of Information request reported by the Telegraph. [Source]

That’s why it’s worth knowing how to avoid being taxed incorrectly in the first place.

How the £1 Pension Trick Works

The £1 pension trick is a clever and entirely legal way to reduce your risk of being emergency taxed when you start accessing your pension pot. It’s not about avoiding tax altogether but rather ensuring that the right amount is paid from the outset, so you don’t have to reclaim hundreds or even thousands of pounds later.

Here’s how it works.

Instead of making a large, taxable withdrawal straight away, you first take a very small sum from your pension—just enough to trigger HMRC’s systems. In many cases, this can be as little as £1, which is where the term originates.

Once that initial, nominal withdrawal is processed, it prompts HMRC to issue your pension provider with an updated, personalised tax code. That code should then be applied to your next withdrawal, ensuring it is taxed more accurately based on your real income and circumstances.

This approach is particularly helpful for those making one-off or irregular withdrawals, rather than setting up a regular income stream. The emergency tax issue tends to arise most often in those early, ad hoc transactions, before the system has had time to adjust.

When to Use the £1 Pension Trick and What to Watch Out For

At Baggette + Co, we regularly recommend this method to clients who are considering their first pension drawdown. Whether you’re retiring fully, starting to phase out of work, or simply accessing funds for a specific life goal, the £1 trick is a small step that can save a lot of hassle.

As independent financial advisers, we believe that tax efficiency is an essential part of any retirement income strategy. This is a prime example of where proactive financial planning can make a real difference.

That said, not all pension providers allow withdrawals of just £1. Some may have minimum limits, often £50 or £100, or charge administrative fees that could make very small transactions impractical. In some cases, a paper request may be needed, as online platforms don’t always support such low-value payments.

Even so, withdrawing £100 instead of £20,000 can still dramatically reduce the amount of emergency tax you pay, making it far easier to reclaim if necessary.

This tactic isn’t guaranteed to eliminate emergency tax completely. It depends on how quickly HMRC processes the new code and whether your provider updates their systems in time for your next withdrawal. But in our experience, it significantly lowers the chance of being overtaxed, and in many cases, avoids the problem altogether.

If you’re considering accessing your pension for the first time, our wealth management team can help you take the right steps. Whether you’re based in Poole, Bournemouth or anywhere in Dorset, working with an experienced independent financial adviser can help you avoid unexpected tax bills, preserve your retirement income and make confident, informed choices.

Financial planning isn’t just about investments or pensions in isolation. It’s about aligning all the moving parts like cashflow, tax, income needs, family plans, into a clear strategy that works for you now and in the future.

At Baggette + Co Wealth Management, our IFAs in Poole take the time to understand exactly what you want from retirement and then build a tailored plan that gets you there. And sometimes, that plan starts with something as small as £1.

What Changed in April 2025 (and Why the £1 Trick Still Matters)

In April 2025, HMRC introduced changes aimed at reducing the number of people affected by emergency tax when withdrawing money from their pension. These updates were designed to improve how quickly tax codes are updated for those taking flexible pension income—particularly for retirees who have set up a regular drawdown arrangement.

Under the revised system, providers are now expected to receive an individual’s correct tax code much sooner. In theory, this means emergency tax should be applied less frequently to those drawing a pension regularly.

However, the reality is more complicated.

The changes are primarily designed for those taking ongoing income, not people making one-off or irregular lump sum withdrawals. If you’re withdrawing money occasionally—perhaps to fund a holiday, support a family member, or cover a specific expense—you’re still at risk of being taxed under a default emergency code.

So while HMRC’s reforms represent a step in the right direction, they don’t fully eliminate the problem for many pension savers.

This is precisely where the £1 pension trick remains useful. By making a small initial withdrawal, whether it’s £1, £50 or £100, you help HMRC identify your status and issue a current, personalised tax code to your provider. That code should then apply to your next withdrawal, ensuring it reflects your real income and minimising the risk of being overtaxed.

At Baggette + Co, we’ve seen first-hand how this continues to benefit clients across Dorset and Hampshire. As independent financial advisers, we don’t rely on rules-of-thumb or hope for the best. We give our clients a structured financial plan that reflects not just how the tax system should work, but how it actually operates in real life.

Even with recent improvements, the £1 trick remains a valuable step for anyone drawing from their pension for the first time or making a one-off withdrawal that sits outside a regular income arrangement. It’s a simple action that can prevent delays, frustration and unnecessary paperwork.

For those who are emergency taxed, the process of reclaiming hasn’t changed. You’ll still need to submit a claim through one of three forms—P55, P50Z or P53Z—depending on how your pension was accessed and whether you’re still working or receiving other income.

You can submit a claim online or by post via HMRC’s official guidance here: https://www.gov.uk/claim-tax-refund

Most refunds are processed within 30 days, but we’ve seen clients wait longer—especially during peak times.

If you’re based in Poole, Bournemouth or the surrounding area, and you’re unsure how these changes affect your retirement income, our IFA team is here to help. As a truly independent wealth management firm, our advice is always shaped by what’s best for you, not product providers or platforms.

Whether you’re withdrawing for the first time, or reviewing your long-term drawdown strategy, we can help ensure your retirement income is tax-efficient, consistent and well aligned with your overall financial planning goals.

Why Withdrawing From Your Pension Early Could Limit Future Contributions

While the £1 pension trick is a useful tactic for avoiding emergency tax, it’s not something to apply automatically without considering the broader implications.

That’s because taking a taxable withdrawal from your pension, whether £1 or £10,000, can trigger something called the Money Purchase Annual Allowance, or MPAA.

The MPAA is a reduced contribution limit that comes into effect once you start drawing taxable income from a defined contribution pension. Before the MPAA is triggered, most people can contribute up to £60,000 a year into their pension and still receive tax relief, provided it doesn’t exceed 100% of their annual earnings. But once the MPAA applies, that limit falls to just £10,000 a year.

That drop can make a significant difference—particularly for individuals in their 50s or early 60s who are still working, running businesses, or making large pension top-ups in the years before retirement.

At Baggette + Co, we often work with business owners and higher earners who plan to make meaningful contributions into their pension in the years leading up to their eventual exit or retirement. Triggering the MPAA too early can restrict that flexibility and, in some cases, lead to missed opportunities for both growth and tax planning.

It’s important to note that the MPAA is only triggered by taxable withdrawals, not by taking your 25% tax-free lump sum.

So, if you move money into income drawdown and only take the tax-free cash, you won’t affect your contribution limits. But the moment you draw even £1 of taxable income, the reduced allowance applies.

That’s why, even when considering the £1 pension trick, we always recommend discussing your intentions in full with a qualified independent financial adviser. For some clients, the trick makes sense. For others, particularly those still building their retirement fund, it might do more harm than good.

Financial planning is never one-size-fits-all. Our role as independent financial advisers in Poole and across Dorset is to help you consider the trade-offs, understand your full financial picture, and make decisions that protect both your short-term needs and your long-term future.

What to Think About Before Accessing Your Pension

Accessing your pension isn’t just a financial transaction, it’s a decision that can shape your entire retirement. Whether you’re withdrawing to fund a major life event, cover unexpected costs, or start drawing a steady income, it pays to consider all the angles.

The £1 pension trick is a smart strategy that, when used correctly, can help you avoid the frustration of emergency tax and unnecessary reclaim paperwork. But it’s not a universal solution. For some people, taking that small initial step can have unintended consequences, particularly if it triggers the Money Purchase Annual Allowance and limits future pension contributions.

It’s also worth remembering that every pound withdrawn now is one less that can grow within your pension over the years ahead. While flexibility is one of the great advantages of pension freedoms, too much spontaneity can come at a cost. That’s why a clear, well-considered financial plan is so valuable.

At Baggette + Co Wealth Management, we work closely with clients across Poole, Bournemouth, Dorset and beyond to help them access their pensions in a way that aligns with their goals, not just today, but for the long term.

Our advice is tailored, impartial and always delivered by a truly independent financial adviser.

Speak to an IFA in Dorset Before You Make a Move

If you’re considering accessing your pension, it’s worth having a conversation first. We’ll help you:

• Understand how your pension income will be taxed
• Avoid the risk of triggering the MPAA unnecessarily
• Use the £1 trick where appropriate
• Align your withdrawals with your broader wealth strategy

To speak to one of our independent financial advisers in Poole, Bournemouth or the wider Dorset and Hampshire area, contact Oscar Hjalmas on 01202 676983 or email [email protected] to arrange a relaxed, no-obligation chat.

At Baggette + Co, we believe in financial planning that supports your life today, and protects it for tomorrow.