HMRC is to reform the much-criticised system it uses to apply emergency tax codes to pension lump sum withdrawals.

HMRC first enacted the system at the beginning of Pension Freedoms in April 2015.

According to pension consultancy LCP, since the system was put in place over 470,000 claims have been made for refunds totalling £1.37bn. 

In the last three months nearly £50m of unnecessary tax payments were repaid to over 14,000 people.

In its latest Pension Schemes Newsletter, HMRC announced that it would move much more quickly to replace emergency tax codes with regular tax codes which will make sure the correct amount of tax is deducted at the time of withdrawal.

LCP said this would drastically reduce the need either for end-year reconciliations or form-filling to claim back over-paid tax, particularly where people make multiple withdrawals in a single year.

HMRC said it will automatically update tax codes for customers who are on a temporary tax code but would benefit from being on a cumulative code from April this year.

The taxman said that there was no need to contact HMRC and once a tax code has been changed it will inform customers by letter of the change.

Steve Webb, partner at pension consultants LCP, said the announcement brings victory in a 10 year campaign to end the scandal of over-taxed pensions.

He said: “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.”