HM Revenue and Customs (HMRC) overcharged millions of pensioners on their tax bills for at least ten years due to an error in calculating state pension income. The taxman is now working to identify affected individuals and issue refunds.
This issue highlights a significant failure in HMRC's tax calculation processes, potentially impacting millions of pensioners and raising questions about the tax authority's transparency and efficiency in rectifying errors.
HM Revenue and Customs (HMRC) has been overcharging millions of pensioners on their tax bills for at least a decade due to an error in how their state pension income was calculated. The tax authority failed to account for the annual rise in the state pension, which is subject to income tax. This error led to up to 8.7 million pensioners being overtaxed by an average of £5, with HMRC netting an estimated £43.5 million last year from the issue.
Reports indicate that pensioners began spotting errors on their tax bills as early as 2016. Former HMRC chief executive Jim Harra was made aware of the problem two years ago, yet the department did not inform the public or initiate refunds despite beginning a formal investigation. The flawed calculations impacted both those paying tax through self-assessment and those still in employment paying via PAYE.
HMRC's guidance suggests calculating tax liabilities using 51 weeks of the current tax year's state pension and one week of the previous year's lower rate to account for payment timing. However, HMRC has been calculating income using 52 weeks of state pension payments at the higher rate, using information from the Department for Work and Pensions (DWP). HMRC stated it is working at pace to fix the issue and expects to resolve it later this summer, though it argued the individual impact is small.