HMRC error could mean millions may have paid too much tax

The issue was first flagged to the DWP in October

An HMRC error could mean millions of people paid more tax than they were meant to. The Department hopes to fix the issue by the summer and is starting work on identifying who may have been affected by the mistake.

An HMRC spokesperson said: “We apologise to those affected by this error and are working at pace to fix the issue, although the impact is small with the difference in tax owed being around £5 in most cases.”

Although the error only overcharged people by around £5 on their tax bill, it’s estimated that up to 8.7 million people were affected meaning HMRC could have collected as much as £43.5million more last year due to the mistake.

According to the Sunday Times, the error went undetected for about 10 months and was reported in August last year by MP Richard Holden. However, it was reportedly not flagged to the Department for Work and Pensions until October.

Who could be affected?

The error affected people who receive state pension, but specifically people who receive these payments and also pay income tax via self-assessment or are still employed and pay tax through PAYE.

HMRC is working to identify exactly who was affected by the error and while it’s not issuing refunds at the moment. But the shadow chancellor has urged the department to reveal how many people were impacted and to start actively issuing refunds.

What went wrong?

State pension is a taxable form of income, but because it increases each April thanks to the Triple Lock mechanism, the rate at which it is taxed changes. This means there’s usually a small gap between the start of the new tax year and when a person would receive their new state pension rate.

To account for this, the amount of tax a pensioner owes is meant to be calculated by using 51 weeks of the new state pensione rate and one week at the old state pension rate, according to HMRC guidance.

When the error occurred, some pensioners’ tax was being calculated using 52 weeks of the new rate. People affected by this miscalculation would have then paid an extra £5 in tax as a result.

Sir Mel Stride, the shadow chancellor, said: “If HMRC have been charging millions of pensioners too much tax then questions need to be answered, and the matter must be urgently put right.

“Ministers need to ascertain what has happened and what action is being taken to ensure these sorts of errors do not happen again.”

Dan Tomlinson, Exchequer Secretary to the Treasury, assured that “most” pensioners are paying the correct amount of tax. But added: “HMRC has become aware that for a subset of individuals in receipt of the state pension, a calculation error means that their tax is calculated based on 52 weeks at the new rate.

“The difference in tax owed is approximately £5. Affected individuals can call HMRC to amend any incorrect figures of state pension.”