HMRC has overcharged millions of retirees in income tax due to a calculation error. The tax authority has now acknowledged that a mistake was made in calculating how much tax older people owe on their State Pension.
While the typical extra cost is quite small at around £5 per person, the huge number of people involved means the overall sum reaches tens of millions of pounds. This calculation mistake could have altered the bills of up to 8.7 million retirees who pay income tax, potentially giving the tax office an extra £43.5 million from older people in the last year alone.
The issue concerns how the tax authority assesses taxable State Pension revenue following annual increases under the triple lock. According to official rules, the tax obligations for retirees should be calculated using 51 weeks at the current rate and one week at the prior year's rate, reflecting how payments fall around the start of the new financial period.
Instead, the tax office used numbers from the Department for Work and Pensions that assumed people got 52 weeks of payments at the newer, increased rate. Because of this, retirement income was recorded as being higher than it truly was and tax bills were inflated.
For the 2025-26 financial year, the full new state pension increased from £221.20 per week to £230.25. That specific difference means that retirement revenue was recorded £9.05 higher than it should have been.
Although the personal cost is small, campaigners say the core principle matters immensely because so many people have been touched by it. The tax office admitted the problem after Conservative MP Richard Holden highlighted it last year.
In a statement, an HMRC spokesman said: "We apologise to those affected by this calculation error and are working to fix the issue, although the impact is small with the difference in tax owed being around £5 in most cases." The tax department is believed to be preparing to correct the situation during the upcoming summer months.
However, several critics are now asking why the problem took so long to be resolved. Reports show that the tax office was initially warned about the situation in August last year, but failed to notify the DWP until October.
Sir Mel Stride, the Shadow Chancellor, said: "If HMRC have been charging millions of pensioners too much tax then questions need to be answered and the matter must be urgently put right. Ministers need to ascertain what has happened and what action is being taken to ensure these sorts of errors do not happen again."
Former pensions minister Sir Steve Webb described it as "remarkably careless" that pensioners had been taxed using incorrect figures. He said: "Most people will not have a clue as to the rules around the taxation of the state pension but you would hope that HMRC would know and apply the rules correctly. Although the sums involved per person are small, it is quite shocking that so little care seems to have been taken to get this right in the first place, rather than fix it after people have been over-taxed."
This situation will probably increase general worries regarding how well the tax authority is performing. The department has faced regular criticism over its customer care levels, and MPs have previously warned that long waiting times are damaging public confidence.
