HMRC says it will shortly be writing to 146,000 pensioners who owe tax for the 2010/2011 tax year and underpayment letters will be sent out at the end of October.

The underpayments have been caused by an error whereby HMRC did not adjust some pensioners’ tax codes to take account of their state pension. State pensions are paid gross ie. with no tax deducted.  But if your total income from all sources, including state pension, is greater than your tax-free allowance, tax is due on your state pension and this will normally be deducted from any private pension or earnings you might have which are paid through the PAYE system.

3 year Repayment

Where a pensioner has underpaid tax for 2010-11, HMRC will automatically spread out that underpayment over a period of three years from April 2012 without them needing to contact HMRC. HMRC will also write to those customers to apologise, explain why the underpayment happened and how the amounts will be collected.

No tax write off

Some lucky pensioners who had a tax underpayment because of state pension errors have had their tax written off. HMRC announced last year that it wouldn’t pursue underpaid tax from before 6 April 2010 because those taxpayers were likely to have a successful claim under Extra Statutory Concession A19 (ESC A19).

ESC A19 can be used by taxpayers to claim that their tax should be written off in cases where HMRC had the correct information about their tax affairs but failed to act on it and where the taxpayer can show that it was reasonable to assume that their tax affairs were correct. But ESC A19 cannot usually be claimed where the arrears are less than a year old, which rules out this option for the 146,000 pensioners affected this year.

HMRC usually adjusts your tax code so that it can collect underpayments over the course of one year.  The fact that HMRC will spread these underpayments over three years is good news as it will lessen the impact on pensioners’ finances but it will still come as an unpleasant surprise for many who will have to adjust to a lower income each month.