HMRC is set to issue repayments to around 3.2 million state pensioners after a calculation error caused them to pay too much tax on their pension income. The total value of the refunds is expected to be approximately £19.3 million, although individual payments will vary depending on each person's circumstances.
The error stems from the way the pension income figure was used to calculate tax. Under the standard annual calculation, pensioners' income is normally assessed using one week at the previous pension rate and 51 weeks at the increased rate. However, some calculations instead applied the higher rate across all 52 weeks, which overstated pensioners' taxable income and led to overpayments.
Correction exercise covers 2020/21 onwards
HMRC's correction exercise will cover affected cases from the 2020/21 tax year onwards. Repayments will be processed automatically through PAYE adjustments, self-assessment credits, or other payment methods, meaning pensioners do not need to take any action to receive their money.
While the average payment is expected to be around £6, some retirees will receive significantly more than this. The variation depends on individual circumstances, including the level of their state pension and other taxable income.
Experts warn many pensioners may not spot the error
Tax experts have noted that many pensioners may have been affected without realising it. Andy Wood, from Tax Barrister UK, explained: "An error like this can be difficult for someone to spot because the pension figure used in their tax calculation may look perfectly plausible.
"The difference between the two calculations might appear small, but accuracy matters. Pensioners should be able to trust that the income figure used to work out their tax is correct."
Automatic corrections welcomed but clarity needed
Wood welcomed the automatic correction process, saying: "Automatic corrections are welcome because they reduce the burden on people who may have had no reason to suspect an error.
"However, the explanation accompanying a correction is just as important. People need to understand which tax years have been reviewed, how their repayment was calculated and whether anything remains outstanding.
"The headline total should also be put into context. This is a correction of tax overpaid, so individuals should not assume they are all entitled to the same amount."
He also highlighted the need for clarity on earlier tax years, adding: "The position for earlier years deserves particular clarity. Someone receiving an automatic correction could reasonably assume that every affected year has been addressed.
"HMRC needs to make the boundaries of this exercise clear, including what evidence it would consider for an earlier period. That would help pensioners understand what has been resolved and where further questions may remain."
