Millions of pensioners may have paid too much tax for years after HMRC repeatedly calculated their state pension income incorrectly, in a row that has sparked calls for ministers to intervene.
Former pensions minister Baroness Ros Altmann accused the authorities of presiding over a pensions “debacle” after it emerged HMRC has been taxing some retirees on more state pension income than they actually received. The tax authority has apologised and is working on a fix, but questions are being asked about how long the problem has been known about and why affected pensioners were not informed sooner.
Baroness Altmann said: “This highlights how crazily complicated the state pension is and how the administration and calculations for pensions prove beyond even the government’s capability.
“Pensioners are not tax experts and just trust that they are being told to pay the right amounts. It is important that lessons are learned from this debacle so that this doesn’t happen again.”
The issue centres on the way HMRC calculates taxable state pension income following the annual increase under the triple lock.
State pensions are subject to income tax but are paid without tax being deducted at source. HMRC therefore calculates pensioners’ tax liabilities separately.
Under HMRC guidance, taxable income should be based on 51 weeks of the current year’s state pension and one week at the previous year’s lower rate. This reflects the fact that pensioners do not immediately receive the higher pension payment when the new tax year starts.
However, HMRC has been using figures supplied by the Department for Work and Pensions that assume 52 weeks are paid at the higher annual rate. The discrepancy is relatively small for most people. HMRC has said the difference in tax owed is around £5 in most cases.
But because millions of pensioners may have been affected over a number of years, the total amount involved could be substantial.
According to estimates reported by The Sunday Times, the cumulative overcharge could have reached as much as £365 million over the past nine tax years. The newspaper’s figure is based on HMRC’s estimate of an average annual overcharge of around £5 per affected pensioner and the number of pension-age taxpayers over the period.
The figure is not an amount that HMRC has confirmed was incorrectly collected. The Sunday Times reported that pensioners had identified discrepancies as far back as 2016 and raised concerns with HMRC during the 2019-20 tax year.
One taxpayer eventually wrote directly to Sir Jim Harra, HMRC’s chief executive at the time, after years of trying unsuccessfully to resolve the matter.
The pensioner, now aged 87, told the newspaper he had provided bank statements showing that the state pension income used by HMRC for tax purposes exceeded the amount actually paid into his account.
He said: “I sent them bank statements that showed irrefutable proof that I received a smaller payment than I was being taxed for.”
The retiree said the discrepancy was initially tiny but became more noticeable as annual state pension increases accumulated under the triple lock. Shadow Chancellor Sir Mel Stride said: “It’s extremely concerning that HMRC appear to have overcharged pensioners by more than £300 million.
“Just as troubling is the apparent failure to take the necessary steps to put this right immediately. Ministers must intervene and establish what has gone so wrong here, and how HMRC intend to put it right.”
HMRC 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 around £5 in most cases.”
The tax authority said it is urgently investigating the issue and aims to introduce a fix this summer. Pensioners who believe they may have been affected can contact HMRC to request a refund.
