Hundreds of thousands of pensioners are thought to be owed a tax refund after HMRC admitted it had overcharged them for at least a decade. The taxman's blunder, which affected up to 8.7 million individuals, stems from an error in calculating state pension income that has resulted in higher tax bills.
The mistake lies in how HMRC accounts for the annual increase in the state pension under the 'triple lock' mechanism. While the state pension rises each April – guaranteeing an increase based on 2.5 per cent, inflation, or average earnings growth – HMRC's calculations used 52 weeks of the higher rate for the entire tax year, deviating from its own guidance.
This flawed methodology impacted pensioners paying income tax through both self-assessment and Pay As You Earn (PAYE) schemes, with the extent of overtaxation growing annually. For example, with the state pension rising to £230.20 per week for the 2025/26 tax year from £221.20 the prior year, the income was incorrectly recorded as £9.05 higher. This translated to an additional £1.80 in tax for basic-rate taxpayers and £3.60 for higher-rate taxpayers.
HMRC's records indicate an average overpayment of £5 per affected individual, with a collective total of estimated £43.5 million in overpaid tax last year. The department is now working to quantify the full scope of individuals affected and rectify the underlying problem later this summer.
The revelation comes as households are under increasing pressure from rising living costs and interest rates. For many pensioners on fixed incomes, any unexpected tax burden can have a significant impact on their disposable income, making it harder to make ends meet.