HMRC have disclosed a long-running error in their systems that has led many pensioners to pay small amounts of excess tax. The issue dates back to 2010 and may have affected as many as 3.1 million pensioners in 2024-25. Affected taxpayers are invited to contact HMRC or, where possible, amend their Self Assessment tax return.
In a letter to the Public Accounts Committee (PAC), HMRC's First Permanent Secretary and Chief Executive, John-Paul Marks, explained that an incorrect taxable State Pension figure is being used in PAYE end-of-year reconciliations.
- This incorrect figure is then fed through into Self Assessment pre-population information and Simple Assessment calculations.
- HMRC have identified that the error may have affected some or all years dating back to:
- 2010-11 for pensioners within PAYE.
- 2015-16 for Self Assessment.
- 2016-17 for Simple Assessment.
The error relates to the way the taxable State Pension amount for a tax year is calculated.
- Tax legislation requires that pensions be taxed on the amount 'accruing' during a year, irrespective of when the amount is actually paid. To comply with this, HMRC's practice is to calculate an individual's entitlement as:
- One week at the previous year's rate plus
- 51 weeks at the current year's rate.
- HMRC's systems have been incorrectly using State Pension amounts equivalent to 52 weeks at the current year's rate.
- In effect, affected pensioners paid tax on the increase between one week's State Pension at the previous year's rate and one week's State Pension at the new rate.
HMRC estimate that the average amount a basic rate taxpayer will have overpaid in any one tax year between 2021-22 and 2024-25 was £1.76 when they received the full basic State Pension or £2.30 when they received the full new State Pension.
- Because HMRC do not generally pursue small underpayments, some taxpayers may not have actually paid the wrong amount of tax overall.
HMRC have said they will deliver a solution this summer to fix the issue and correct future tax calculations.
- The solution will ensure that 2025-26 tax calculations include the correct State Pension amounts for those in PAYE and Simple Assessment.
- It will also enable HMRC to correct 2025-26 Self Assessment tax returns that have already been filed.
For those who have paid too much tax, HMRC said they will consider individual cases in line with established processes.
- HMRC can be contacted via the usual channels, including the PAYE and Self Assessment helpline, or in writing.
- Where possible, the Self Assessment tax return could be amended.
Useful guides on this topic
Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?
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