The Department for Work and Pensions faces mounting pressure as shocking new figures reveal that thousands of pensioners have been hit with unexpected tax bills due to systemic errors in state pension payments.
According to data obtained through Freedom of Information requests, HMRC issued tax demands to approximately 7,000 pensioners in the 2022/23 tax year alone. These demands stem from DWP correcting historical underpayments that pushed recipients into higher tax brackets unexpectedly.
The Scale of the Problem
The issue primarily affects pensioners, particularly married women and those over 80, who were underpaid their state pension for years. When the DWP finally corrects these errors and pays the arrears in lump sums, the sudden income spike triggers tax liabilities that many pensioners are completely unprepared for.
Former Pensions Minister Steve Webb, now partner at LCP, who uncovered the scandal, told The Independent: "It is shocking that thousands of people are being hit with tax demands because of errors made by the pension authorities. Many of these are older pensioners, mainly women, who are already on low incomes and are now faced with demands for hundreds of pounds in tax."
How the Tax Trap Works
The problem occurs through a perfect storm of administrative failures:
- Pensioners are underpaid their state pension, sometimes for many years
- The DWP discovers the error and pays a lump sum covering all arrears
- This lump sum is treated as taxable income in the year it's paid
- HMRC then issues tax demands, often catching pensioners by surprise
Many affected individuals are basic rate taxpayers who normally wouldn't owe significant tax, but the lump sum payments can push them into higher tax brackets temporarily.
Growing Backlog and Delayed Justice
The situation is compounded by the sheer scale of the DWP's underpayment problem. The department is currently working through a backlog of nearly 100,000 cases of historical underpayments linked to outdated systems and computer errors.
Webb emphasised the double injustice: "Many of these women have been underpaid for years, and then to rub salt in the wound they get a tax demand. It cannot be right that pensioners are being chased for tax when the original error was not of their making."
Calls for Systemic Reform
Campaigners and experts are demanding urgent action, including:
- Better communication between DWP and HMRC about lump sum payments
- Advanced warning to pensioners about potential tax implications
- Options for spreading arrears payments over multiple tax years
- Simplified processes for vulnerable pensioners facing unexpected demands
The DWP maintains it's working to correct historical errors as quickly as possible, while HMRC states it helps taxpayers struggling with payments through installment arrangements. However, for thousands of pensioners facing financial distress, these assurances provide little comfort against immediate tax demands.
