An estimated 1.7 million state pensioners may have been overcharged tax due to a major error by HM Revenue and Customs (HMRC). Under Department for Work and Pensions (DWP) and HMRC rules, retirees typically do not need to complete a self-assessment tax return if their income comes solely from the State Pension, workplace pensions, or savings interest, as tax is automatically deducted. However, those with more complex income sources must file a self-assessment form each year.
HMRC has admitted to significant mistakes in pre-populating the state pension figure on these forms, leading to overcharges and refunds owed. The issue arises because HMRC pre-populates the state pension amount at the current year's weekly rate multiplied by 52 weeks. However, the correct calculation, as per HMRC guidance, should be one week at the previous year's rate and 51 weeks at the new rate. This discrepancy results in a slightly higher figure being used, causing pensioners to be taxed on income they did not receive.
Expert Reaction
Steve Webb, partner at pension consultants LCP and former pensions minister under the coalition government, commented: "The way the state pension is taxed is a regular source of confusion, but it is worrying that HMRC seem to have been getting it wrong themselves. For pensioners who have to file an annual tax return, they need to check what figure has been included for state pension."
He added: "The HMRC guidance notes alongside the tax return correctly say that you should enter one week at the previous year's rate and 51 weeks at the new year's rate. But it sounds as though HMRC has wrongly been automatically including a slightly higher figure based on 52 weeks at the new rate. HMRC need to fix this, and meanwhile individuals filing their tax return should make sure they have not been taxed on a figure that is slightly too high."
What Pensioners Should Do
Pensioners who file self-assessment tax returns are advised to carefully check the pre-populated state pension figure. If it appears to be based on 52 weeks at the current rate, they should amend it to the correct calculation: one week at the previous year's rate and 51 weeks at the new rate. Any overpaid tax can be reclaimed from HMRC. The error affects an estimated 1.7 million pensioners annually, and HMRC is urged to rectify the system to prevent further overcharges.
