Pensioners gain tax write-off 250,000 underpay tax due to HMRC's tax code error

12 January 2011

In 2010, HMRC revealed that millions of people had received incorrect tax codes and that 1.4m had underpaid income tax. It has now admitted that a further 250,000 people who receive state pension were also sent incorrect codes but will be let off any underpayment of tax.

State pension ignored

The latest PAYE failing is that during 2008-9 and 2009-10 state pension income was ignored in the tax codes issued to 250,000 pensioners. This means that many will have unwittingly underpaid tax and could have been faced with an unexpected demand to make good the shortfall. 

As widely reported last year, HMRC faces difficulties in such cases due to Extra Statutory Concession A19, which says that it should act on relevant information within a year of receiving it. Rather than send out tax demands and run the risk of widespread appeals, the government has decided to write off the outstanding amount.

Treasury Minister, David Gauke, said:  'HMRC estimate that there are about 250,000 cases in respect of 2008-09 and 2009-10 where a taxable state pension has been paid by DWP and the tax due on this pension should have been collected through a tax code adjustment. 

'These pensioners have not yet been issued with a notice of underpayment but would have a strong case for their underpayment to be written off in line with the concession. HMRC will not require these pensioners to claim the concession individually, but will instead write off all the relevant underpayments.'

Further demands in the pipeline

Although HMRC has dealt with millions of PAYE errors from 2008-9 and 2009-10, it has just announced that it intends to go back to 2007-8 and send out notices to those who are suspected of underpaying tax in this year too. 

Confirming this development, Mr Gauke said: 'Further underpayment notices will not be issued for years earlier than 2007-08. For 2007-08, where possible, any amounts due will be included in the tax code for 2011-12 so that the money is collected over the course of the year through PAYE. HMRC will apply the same treatment to these cases as to those for 2008-09 and 2009-10. 

'HMRC will not be collecting sums for less than £300 for that year and will allow people to spread payments in cases of hardship. Taking these concessions into account, HMRC expect to be in touch with around 450,000 people before the end of March to collect underpayments to the value of some £180 million.'

Possible appeals

Tax experts at the Chartered Institute of Tax's Low Incomes Tax Reform Group have commented that:  'individuals should have even stronger arguments to resist demands for tax that should have been assessed so many years ago.' They have promised to provide self-help material for those concerned. 

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