Millions of retired individuals are currently facing excessive income tax charges from HMRC, with the issue still unresolved. It is estimated that up to 8.7 million state pensioners have been impacted, resulting in an average tax increase of approximately £5 per person. Last year alone, HMRC may have collected as much as £43.5 million due to this error, as reported by The Sunday Times.
The problem seems to stem from HMRC’s failure to adjust for the state pension increase under the triple lock system, which ensures a rise in line with the highest of inflation, average earnings, or 2.5%. Pensioners are expected to be taxed based on 51 weeks at the new pension rate and one week at the previous rate to account for the transition period. However, the error in calculation has led to tax assessments being based on 52 weeks at the higher pension rate.
Pensioners subject to income tax, whether through self-assessment or PAYE if they are still working, could be affected by this issue. While the problem was raised with HMRC 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 not yet reached out to those potentially impacted. Affected individuals can contact HMRC directly for a refund.
An HMRC spokesperson expressed regret over the error and assured that efforts are underway to address it promptly. Despite the relatively small impact, averaging around £5 per person, Sir Steve Webb, a former pensions minister, criticized the oversight, emphasizing the importance of correctly applying taxation rules to avoid unfair taxation of pensioners.