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Millions of UK pensioners pay too much tax

£250m too much tax paid says National Audit Office

Up to 1.5m older people in the UK have paid a total of £250m too much in tax, according to a new report from the National Audit Office (NAO).

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The new NAO research showed that many errors occur because people’s tax affairs become more complicated when they reach pension age and HMRC’s systems do not cope well with their multiple sources of income.

Average £171 in overpaid tax

The NAO estimates that, by March 2009, as a result of discrepancies between HMRC’s records and tax deducted by employers and pension providers, around 1.5m older people had overpaid tax by an average of £171 (£250 million in total), while around 500,000 had underpaid tax by an average of £207 (£100 million in total).

These errors often have a disproportionate effect on older people as their net average annual income of £16,000 was around 25 per cent below the national average in 2006-07, according to National Audit Office statistics. A new computer system introduced in June 2009 is expected to reduce the level of errors in the future.

Many pensioners not claiming age-related allowances

Older people may also be paying more tax because they do not claim additional age-related tax allowances. The NAO estimates that some 3.2 million older people do not claim the additional allowances, some because they do not have sufficient income to pay tax and others because they do not realise they are entitled to them. HMRC estimates that some 2.4 million older people have also paid around £200 million more in tax because they did not have their savings income paid gross.

Amyas Morse, head of the National Audit Office, commented: ‘Older people want to pay the right amount of tax but too many pay more than they need to because they do not claim allowances to which they are entitled and because of errors. By providing a more coherent service, HMRC could make substantial savings as the number of enquiries from older people about their tax affairs would reduce. A win-win situation for all.’

NAO report supported by Low Incomes Tax Reform Group

The Low Incomes Tax Reform Group (LITRG) welcomed the publication of the NAO’s ‘damning’ report, commenting: ‘That 1.5m pensioners are overcharged by HMRC is no surprise to LITRG and we have written three reports in the last 12 years identifying all the causes. In that time HMRC have only paid lip service to correcting the fundamental faults in their service strategy. It is not often that we can heartily endorse almost every word in a NAO report, but this is an exception.’

Which? pensions and allowances advice

To make sure you’re receiving all the allowances to which you’re entitled, check out the Which? guide to tax and allowances for older people. If you’re nearing retirement, read our guide to planning your retirement.

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