Millions of retirees are facing overcharges in income tax by HMRC, and the issue has yet to be rectified. Approximately 8.7 million state pensioners have been impacted, seeing 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 stems from HMRC’s failure to adjust for the state pension increase under the triple lock system, which ensures a rise based on the highest among inflation, average earnings, or 2.5%.
The state pension is taxable, with taxation applicable only if the total annual income surpasses the tax-free personal allowance, set at £12,570 for the 2026/27 tax year. According to HMRC guidelines, pensioners’ tax should be computed using 51 weeks at the new pension rate and one week at the previous rate to accommodate the transition period.
However, an error has led to tax calculations using 52 weeks of payments at the higher pension rate, affecting pensioners subject to income tax through self-assessment or PAYE if still employed.
While the issue was flagged to HMRC in August, the Department of Work and Pensions (DWP) was only informed in October. HMRC is expected to resolve the problem later this summer but has not yet reached out to potentially affected individuals. Affected pensioners can contact HMRC for a refund.
An HMRC spokesperson expressed regret over the error, noting that the impact is minimal, with discrepancies in tax owed averaging around £5. Sir Steve Webb, a former pensions minister, criticized the situation, highlighting the importance of accurate application of tax rules by HMRC to prevent overtaxation of pensioners.
