Millions of retirees are currently facing overcharges in income tax by HMRC, with the issue yet to be resolved. Approximately 8.7 million state pensioners have been impacted, resulting in an average increase of around £5 in their tax bills. Last year, HMRC may have collected up to £43.5 million due to this error, as reported by The Sunday Times.
The problem is thought to stem from HMRC’s failure to adjust for the state pension increase under the triple lock system, which ensures a rise based on the highest figure among inflation, average earnings, or 2.5%.
The state pension is taxable, but individuals only pay tax if their total annual income surpasses the tax-free personal allowance, which is £12,570 for the 2026/27 tax year. According to HMRC guidelines, pensioners’ tax should be calculated based on 51 weeks at the new state pension rate and one week at the old rate to bridge the transition period.
However, the error has led to tax liabilities being computed using 52 weeks of payments at the higher state pension rate, affecting pensioners who pay income tax through self-assessment or PAYE if they are still working.
Although the issue was raised with HMRC in August, the Department of Work and Pensions (DWP) was not informed until October. HMRC is expected to rectify the problem later this summer and will provide an update soon. Affected pensioners can also contact HMRC to seek a refund.
An HMRC spokesperson expressed regret over the error, noting that the impact is minor, with an average difference of £5 in tax owed. Sir Steve Webb, a former pensions minister, criticized the oversight, stating that while the per-person amounts are small, the lack of attention to detail in the initial tax calculations is concerning.
This situation highlights the importance of accurate tax calculations for pensioners and the necessity for HMRC to promptly address and rectify any errors that may arise in the process.