The tax office has admitted an error where it used the wrong state pension figures to calculate the tax owed by some pensioners
HMRC should not calculate your taxable state pension based on a full year at the current value of your state pension(Image: Getty)
Millions of pensioners who were overtaxed on their state pension are set to receive refunds from HMRC.
The tax office has admitted an error where it used the wrong state pension figures to calculate the tax owed by some pensioners.
The state pension rises every April but the increase does not always apply on the first day of the new tax year. The higher rate often comes into effect a few days after this.
As a result, HMRC rules state that it should calculate your annual taxable state pension using one week at the previous tax year’s lower rate and 51 weeks at the new higher rate.
But the tax office has charged some pensioners the higher rate for the full 52 weeks – which means those affected would have paid more tax than they should have.
HMRC is set to refund £19.3million to around 3.2 million people, with the average repayment being around £6 per person, though it will vary between individuals.
HMRC will issue refunds automatically by adjusting PAYE tax code, crediting self-assessment accounts or other payment methods where necessary. It expects to complete this in the 2026/27 financial year.
The Telegraph, which first uncovered the discrepancy, says the error dates back 15 years. However, the HMRC correction exercise will go back to the 2020/21 tax year.
HMRC advises anyone who believes they were impacted beyond this date to get in contact and these requests will be considered on a case-by-case basis.
In a letter to the Treasury Select Committee (TSC) earlier this month, HMRC chief executive John-Paul Marks said: “I am sorry that this error occurred and recognise the impact on affected customers.
“As set out in my earlier letter, we will also conclude an Internal Audit review, ensuring the lessons are identified and applied in future.”
It comes after it was revealed last week that the state pension looks set to rise by just under £500 a year from next April – but it means millions of retirees will be pushed over the tax-free threshold.
The state pension rises every year in line with the triple lock promise, which guarantees that it goes up by whichever is higher out of inflation, wages or 2.5%.
New figures show average wage growth, including bonuses, was 3.9% in the three months to July. In comparison, inflation is currently 3.1%.
The new state pension is currently worth £12,547.60 a year but would rise to £13,036.40 if an increase of 3.9% is applied.
This will also take the state pension above the £12,570 tax-free allowance, which is the amount you can earn each year before you start to pay tax.
The Treasury has confirmed that people whose sole income is the state pension “without any increments” will not have to pay income tax – though it has not spelled out how this will work.
