Labour admits knowing for a year millions of state pensioners were overcharged £43.5million by HMRC

Millions of state pensioners were overcharged income tax while Labour ministers knew about the issue for at least a year before taking action.

Pensions minister Torsten Bell admitted the Government had been aware of the problem since June last year.

The HM Revenue and Customs (HMRC) calculation error is estimated to have affected up to 8.7 million retirees who pay income tax on their state pension, with each pensioner overcharged by around £5 on average.

Mr Bell said: "We have become aware that for a small sub-set of customers in receipt of the state pension, [there has been] a calculation error".

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The issue stems from a discrepancy between HMRC's published guidance and the figures used when calculating pensioners' tax liabilities.

Under HMRC rules, the taxable portion of the state pension should be calculated using one week at the previous year's lower rate and 51 weeks at the current year's rate.

This reflects the short period between the start of the new tax year and the Monday when updated state pension rates take effect.

However, HMRC has instead been taxing pensioners on 52 weeks at the higher rate by relying on information supplied by the Department for Work and Pensions.

The error is thought to have generated as much as £43.5million for the Treasury in the last year alone.

A former HMRC employee who identified the discrepancy believes the issue may have persisted since the 2023-24 tax year.

Tax expert Mike Warburton, who first highlighted the problem in May, said the situation represented a serious failing within Government.

Mr Warburton said: "We have two Government departments at odds with each other and potentially the whole pensioner population being overcharged.

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"They've taxed pensioners more than they say the law requires, so it's to the taxpayer's disadvantage. I think HMRC has got itself into a big hole."

Robert Salter, a director at tax advisory firm Blick Rothenberg, said many of those affected would have been unlikely to notice the discrepancy themselves.

Mr Salter said: "You're going to assume it's correct. Let's be honest, almost nobody is going to double check that."

"The bigger issue is that especially for people on relatively low incomes, this tax matters. It's money you could have spent that HMRC haven't legally got the right to have."

Despite ministers being aware of the issue for at least 12 months, pensioners have not been formally notified that they may have been overcharged, and the matter remains unresolved.

Incorrect figures were still appearing on pre-populated tax returns for the 2025-26 tax year as recently as last month.

When questioned in Parliament in September last year, exchequer secretary Dan Tomlinson said that "most pensioners pay the right amount of tax in real time".

He suggested that "affected individuals can call HMRC to amend any incorrect figures of state pension".

A HMRC spokesman 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."

Official sources have indicated that the problem is expected to be resolved later this summer.

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