Millions of pensioners are set to receive tax refunds after an HMRC calculation error left them paying too much tax on their state pension.
Around 3.2 million pensioners are affected, with repayments expected to total around £19.3 million.
That works out at roughly £6 per person on average, although the amount each pensioner receives will vary.
The error relates to the way HMRC calculated annual state pension income when working out how much tax was due.
Tax specialist Andy Wood from Tax Barrister UK said the mistake could have been difficult for pensioners to spot – and warned that those affected need clear information about exactly which years have been checked.
How did the state pension tax error happen?
The problem concerns the pension income figure used in HMRC’s tax calculations.
Normally, where the state pension increases during the tax year, the annual figure should include one week at the previous pension rate and 51 weeks at the increased rate.
However, some calculations instead used the higher pension rate for all 52 weeks.
This meant the annual pension income figure was overstated, potentially resulting in too much tax being collected.
Andy Wood said: “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.”
How will pensioners get their money back?
The HMRC correction exercise covers affected cases from the 2020/21 tax year onwards.
Pensioners do not generally need to apply for the correction. Repayments will be dealt with automatically through PAYE adjustments, Self Assessment credits or other payment methods, where appropriate.
Andy said automatic corrections should make the process easier for people who had no reason to realise something had gone wrong.
He said: “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.”
Pensioners could still need to check earlier years
One important point is that the automatic correction does not cover tax years before 2020/21.
HMRC does not hold sufficient data to correct those cases automatically. However, people who believe they may have been affected in an earlier year can request an individual review and provide supporting evidence.
That means pensioners should not necessarily assume that an automatic repayment means every possible overpayment has been dealt with.
Andy said: “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.”