Pensioners who suspect they may have been impacted are encouraged to contact HMRC
Millions of pensioners may have been overtaxed for years after HMRC repeatedly miscalculated their state pension income, in a controversy that has prompted demands for ministerial action.
Former pensions minister Baroness Ros Altmann accused the authorities of overseeing a pensions “debacle” after revelations that HMRC has been taxing certain retirees on state pension income exceeding what they actually received. The tax authority has issued an apology and is developing a solution, but concerns are mounting about how long officials were aware of the problem and why affected pensioners weren’t notified earlier.
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 problem revolves around HMRC’s method of calculating taxable state pension income following the annual uplift under the triple lock. State pensions are liable for income tax but are distributed without tax deductions at source. HMRC must therefore work out pensioners’ tax obligations independently.
According to HMRC guidance, taxable income ought to be calculated on 51 weeks of the current year’s state pension and one week at the previous year’s lower rate. This accounts for the fact that pensioners don’t instantly receive the increased pension payment when the new tax year begins.
However, HMRC has been relying on figures provided by the Department for Work and Pensions that presume 52 weeks are paid at the higher annual rate. The difference is relatively minor for most people. HMRC has stated the variation in tax owed is approximately £5 in most instances.
But given that millions of pensioners may have been impacted over several years, the total sum involved could be significant.
Based on estimates reported by The Sunday Times, the accumulated overcharge could have reached as much as £365 million over the past nine tax years. The newspaper’s calculation is based on HMRC’s estimate of an average annual overcharge of roughly £5 per affected pensioner and the number of pension-age taxpayers during the period.
This figure is not an amount that HMRC has confirmed was wrongly collected. The Sunday Times reported that pensioners had spotted discrepancies dating back to 2016 and raised concerns with HMRC during the 2019-20 tax year.
One taxpayer ultimately wrote directly to Sir Jim Harra, HMRC’s chief executive at the time, after years of attempting unsuccessfully to resolve the issue. The pensioner, now 87 years old, revealed to the publication that he had submitted bank statements demonstrating that the state pension figure used by HMRC for taxation purposes was higher than what was actually deposited into his account.
He explained: “I sent them bank statements that showed irrefutable proof that I received a smaller payment than I was being taxed for.”
The retired person noted that while the discrepancy was initially negligible, it became increasingly apparent as yearly state pension rises under the triple lock built up.
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 responded: “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 body confirmed it is urgently examining the matter and plans to implement a solution this summer. Pensioners who suspect they may have been impacted are encouraged to contact HMRC to request reimbursement.
