HMRC has admitted that 1.4 million pensioners were overtaxed last year after an error in its calculations went unnoticed for more than a decade. The tax authority said the issue stemmed from a system change made in 2010 and apologised after the mistake was uncovered by the Telegraph.
The error affected pensioners whose state pension income was used by HMRC to calculate how much tax they owed. In a letter to MPs, John-Paul Marks, chief executive of the tax office, apologised for the mistake, which has led to pensioners being overcharged since 2010-11. He wrote: “I apologise for this error and especially to those pensioners who have been affected. I know that any shortfall matters, particularly to customers on fixed or limited incomes.
“I would like to reassure the committee that HMRC is taking this issue very seriously and we are working at pace to put in place a solution.”
Although the state pension is taxable, it is paid without tax being deducted at source. This means HMRC normally collects any tax owed by adjusting a person’s tax code if they have another source of income, such as a private pension or earnings.
Those whose only income is the state pension may instead receive a Simple Assessment tax bill if they owe money.
However, campaigners have warned that many older people find the system confusing and may not realise they have been charged too much.
Jon Greer, of investment company Quilter, said: “While the amounts involved appear relatively small at an individual level, the fact it has affected so many people means it may have unfairly topped up government coffers.”
The mistake comes amid growing concern that more retirees are being dragged into the tax system because of frozen income tax thresholds and rising state pension payments.
The full new state pension is now £241.30 a week, equivalent to around £12,548 a year, just below the standard personal allowance of £12,570.
This leaves pensioners with only a small amount of tax-free headroom before other income, such as savings interest or a workplace pension, triggers an income tax bill.
Mike Warburton, The Telegraph’s tax columnist, who revealed the problem in May, said: “There seems to be a state of chaos in HMRC over this issue and it is pensioners who are being left confused and overtaxed.”
An HMRC spokesman said: “We’re confident most state pensioners won’t be affected, and for those that are, the impact is small, with the difference in annual tax paid only a few pounds in most cases.”