HMRC has been overtaxing pensioners for approximately 10 years due to a major calculation error, affecting around 8.7 million individuals. The average overcharge is about £5, resulting in HMRC collecting an extra £43.5 million in revenue last year alone. The error stems from HMRC using incorrect figures in its tax calculations, specifically failing to account for the annual increase in the state pension under the triple lock system, which raises payments by the highest of inflation, average earnings, or 2.5%.
How the Error Occurred
HMRC calculated pensioners' tax bills by assuming 52 weeks of state pension payments at the current year's rate. However, this method did not account for the period between the start of the new tax year and when pensioners actually receive their increased payments. In reality, for the first few weeks of the tax year, pensioners are still receiving the previous year's lower rate. By using the higher rate for the full year, HMRC overestimated taxable income, leading to higher tax bills.
According to the Sunday Times, this error has been present for at least a decade, with HMRC only now taking steps to correct it. The tax authority failed to notify the public or issue refunds since the issue began in 2016. HMRC is currently working to determine the full extent of affected pensioners.
Who Is Affected?
Pensioners who pay income tax through self-assessment or via PAYE (for those still working) are affected. HMRC expects to fix the issue later this summer and will provide an update soon. An HMRC spokesperson said: “We apologise to those affected by this error and are working at pace to fix the issue, although the impact is small with the difference in tax owed being less than £5 in most cases.”
What Pensioners Should Do
Pensioners are advised to check their tax bills for potential overcharges. If you believe you have been overcharged, you can contact HMRC directly online or by phone at 0300 200 3300, Monday to Friday from 8am to 6pm. HMRC will handle refunds for those affected.
