HMRC has admitted that 1.4 million pensioners were overtaxed last year, with the error dating back to a system change in 2010. The tax authority's chief executive, John-Paul Marks, apologised after the mistake was uncovered by The Telegraph.
System Error Since 2010
The issue originated from a system modification made in 2010 that affected how HMRC calculated tax on state pension income. In a letter to MPs, Marks wrote: 'I apologise for this error and especially to those pensioners who have been affected. I know that any shortfall matters, particularly to customers on fixed or limited incomes.'
He added: 'I would like to reassure the committee that HMRC is taking this issue very seriously and we are working at pace to put in place a solution.'
How the Tax System Works for Pensioners
Although the state pension is taxable, it is paid without tax deducted at source. HMRC normally collects tax owed by adjusting a person's tax code if they have other income, such as a private pension. Those with only the state pension may receive a Simple Assessment tax bill.
Campaigners warn that many older people find this system confusing and may not realise they have been overcharged. Jon Greer of Quilter said: 'While the amounts involved appear relatively small at an individual level, the fact it has affected so many people means it may have unfairly topped up government coffers.'
Impact of Frozen Tax Thresholds
The mistake comes amid growing concern that more retirees are being dragged into the tax system due to frozen income tax thresholds and rising state pension payments. The full new state pension is now £241.30 a week, around £12,548 a year, just below the personal allowance of £12,570. This leaves pensioners with minimal tax-free headroom before other income triggers a tax bill.
Mike Warburton, The Telegraph's tax columnist who revealed the problem in May, said: 'There seems to be a state of chaos in HMRC over this issue and it is pensioners who are being left confused and overtaxed.'
HMRC's Response
An HMRC spokesman said: 'We're confident most state pensioners won't be affected, and for those that are, the impact is small, with the difference in annual tax paid only a few pounds in most cases.'
