Millions of retirees are facing excessive income tax charges from HMRC, and the tax authority has yet to resolve the issue. Approximately 8.7 million state pensioners have been impacted, with an average increase of £5 in their tax bill. Last year, HMRC may have collected up to £43.5 million due to this error, as reported by The Sunday Times.
The problem is thought to stem from HMRC’s failure to adjust for the state pension increase under the triple lock mechanism, which ensures a rise based on the highest figure among inflation, average earnings, or 2.5%.
The state pension is taxable, but individuals only pay tax if their total annual income surpasses the tax-free personal allowance. For the 2026/27 tax year, the standard tax-free personal allowance stands at £12,570.
According to HMRC guidelines, pensioners’ tax calculations should consider 51 weeks at the new state pension rate and one week at the previous rate to accommodate the transitional period. However, an error in the calculation has led to tax liabilities being based on 52 weeks at the higher pension rate.
Affected individuals include pensioners subject to income tax through self-assessment or PAYE for those still employed. Although the issue was raised with HMRC in August, the Department of Work and Pensions (DWP) was only informed in October.
HMRC is anticipated to rectify the error later this summer but has not yet reached out to potentially impacted individuals. However, affected pensioners can proactively contact HMRC for a refund.
A spokesperson from HMRC expressed regret for the error, acknowledging the small impact with an average difference of £5 in tax owed per case. Sir Steve Webb, a former pensions minister and partner at pension consultants LCP, criticized the oversight, emphasizing the importance of correctly applying tax rules to avoid overtaxing pensioners.
