Millions of retirees are currently facing overpayments in income tax due to errors made by HMRC, with the issue still unresolved. Approximately 8.7 million state pension recipients have been impacted, resulting in an average tax increase of around £5 per person. Last year, it is estimated that HMRC may have collected up to £43.5 million as a consequence of this error.
The problem seems to stem from HMRC’s failure to adjust for the state pension increase under the triple lock system, which guarantees a rise based on inflation, average earnings, or 2.5%. The state pension is taxable, but individuals only pay tax if their total annual income exceeds the tax-free personal allowance, currently set at £12,570 for the 2026/27 tax year.
HMRC’s calculations for pensioners’ tax should consider 51 weeks at the new higher state pension rate and one week at the old rate to accommodate the transition period. However, an oversight led to tax liabilities being calculated using 52 weeks of payments at the increased rate.
Pensioners who pay income tax through self-assessment or PAYE, if still employed, might be affected by this issue. Although the problem was brought to HMRC’s attention in August, the Department of Work and Pensions (DWP) was only informed in October. HMRC is anticipated to rectify the situation in the coming months but has yet to notify potentially impacted individuals. Affected pensioners can also proactively reach out to HMRC for a refund.
An HMRC spokesperson expressed regret for the error and assured that efforts are underway to address it promptly. Sir Steve Webb, a former pensions minister and pension consultant, criticized the oversight, highlighting the importance of accurate application of tax rules for state pensioners. While the financial impact per person is relatively small, the negligence in getting the calculations right initially is concerning.