Millions of retired individuals are facing excess taxation by HMRC, with the issue still unresolved. Approximately 8.7 million state pension recipients have been impacted, seeing an average increase of around £5 in their tax bills. The total amount potentially collected by HMRC last year due to this miscalculation is estimated to be as high as £43.5 million, as reported by The Sunday Times.
The problem stems from HMRC’s failure to adjust for the state pension increase under the triple lock system, which guarantees a rise based on the highest value among inflation, average earnings, or 2.5%.
The state pension is taxable, but only if the overall annual income surpasses the tax-free personal allowance, which stands at £12,570 for the 2026/27 tax year. HMRC advises that pensioners’ tax should be computed using 51 weeks at the new pension rate and one week at the previous rate to cover the transition period.
However, the error occurred by basing tax calculations on 52 weeks of payments at the higher pension rate. Affected individuals include pensioners liable for income tax through self-assessment or PAYE for those still working.
The issue was brought to HMRC’s attention in August but was not communicated to the Department of Work and Pensions (DWP) until October. HMRC is expected to address the problem in the near future, although affected individuals have not been contacted yet. Pensioners can proactively reach out to HMRC for potential refunds.
An HMRC spokesperson expressed regret over the error, noting that the impact is minimal, with most affected individuals owing around £5 extra in taxes. Sir Steve Webb, a former pensions minister, criticized the oversight, highlighting the importance of accurate application of tax rules to prevent undue financial burden on pensioners.
