HMRC has issued an apology after it emerged that millions of pensioners may have been overtaxed for years due to repeated miscalculations of their state pension income. The controversy has prompted demands for ministerial intervention, with former pensions minister Baroness Ros Altmann describing the situation as a pensions "debacle."
How the Overcharging Happened
The problem stems from 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 being deducted at source, so HMRC determines pensioners' tax obligations separately. According to HMRC guidance, taxable income should be calculated using 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 do not 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 assume 52 weeks are paid at the higher annual rate. This discrepancy, while relatively minor for most individuals—amounting to approximately £5 in extra tax per year—has accumulated over time and affected millions of pensioners.
Scale of the Error
Based on estimates reported by The Sunday Times, the accumulated overcharge could have reached as much as £365 million across the past nine tax years. The newspaper's calculation is derived from HMRC's estimate of an average annual overcharge of roughly £5 per affected pensioner and the number of pension-age taxpayers throughout the period. The figure is not a sum that HMRC has verified was wrongly collected, but it highlights the potential scale of the issue.
Pensioners had reportedly 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 unsuccessful attempts to resolve the issue. The pensioner, now aged 87, told The Sunday Times he had submitted bank statements demonstrating that the state pension income used by HMRC for taxation purposes exceeded the sum actually deposited 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 explained that the difference was initially minimal but grew increasingly apparent as yearly state pension rises accumulated under the triple lock.
Reactions and Demands for Action
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." Shadow Chancellor Sir Mel Stride added: "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's Response
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 confirmed it is urgently examining the matter and intends to implement a solution this summer. Pensioners who suspect they may have been impacted can contact HMRC to request a refund.
