State Pension And Tax: What HMRC Gets Wrong And How To Check If You're Affected

Tax Queen

Tax Expert @ Pie

3 min read

State Pension and tax mistakes are not always obvious. You may receive the right weekly State Pension payment but still pay the wrong amount of tax. You may also rely on a State Pension forecast that later turns out to be different from the amount you actually receive.

HMRC has previously corrected errors in its online State Pension forecast tool, including problems linked to people who were “contracted out” of the additional State Pension before April 2016.

But the bigger issue is ongoing: State Pension tax and forecast errors can happen for several reasons, and they can affect people before and after retirement.

This guide explains the most common State Pension and tax errors, how to check whether your forecast looks right, and what to do if you think you have overpaid tax.

Why State Pension tax errors happen

The State Pension is taxable income, but tax is not normally deducted before it is paid. If you file Self Assessment, you may need to report State Pension on a Self Assessment tax return, especially if you also receive private pension income, employment income, savings interest or other taxable income.

Instead, HMRC usually collects any tax due through another source of income or through a separate tax calculation. This may include:

a workplace pension
a private pension
employment income
a Self Assessment tax return
a Simple Assessment tax bill

This can make State Pension tax confusing. Your State Pension may arrive in full, while the tax due on it is collected by reducing the tax-free allowance applied to another pension or income source.

For example, if you receive a workplace pension as well as the State Pension, HMRC may adjust your PAYE tax code so more tax is deducted from your workplace pension.

If HMRC uses the wrong State Pension figure, the wrong private pension amount, or an estimated income that does not match reality, you could pay too much or too little tax.

What HMRC can get wrong

State Pension and pension tax errors can come from several places. The most common include:

1. Incorrect State Pension forecasts

A State Pension forecast is an estimate of what you may receive when you reach State Pension age. It is based on your National Insurance record and other pension rules.

Forecasts can be wrong or misleading if your National Insurance record is incomplete, if manual adjustments have not been reflected correctly, or if your history includes contracted-out years.

Contracting out was common before April 2016. It meant that some employees paid lower National Insurance contributions or had contributions redirected into a workplace or private pension instead of building up additional State Pension. This can reduce the amount of new State Pension someone receives.

This is why some people with 35 qualifying years may still receive less than the full new State Pension. The “35 years” rule is a useful starting point, but it does not always tell the full story for people who built up National Insurance records before April 2016.

2. Missing or incomplete National Insurance years

Your State Pension depends on your National Insurance record. If a year is missing, incomplete or wrongly recorded, your forecast may be lower than expected.

This can happen where employment records are missing, National Insurance credits have not been applied, or someone was out of work, self-employed, caring for family, claiming certain benefits, or living abroad.

Before paying voluntary National Insurance contributions, check whether filling the gap will actually increase your State Pension. Some missing years improve your entitlement, while others may make little or no difference.

3. Wrong PAYE tax codes

Because State Pension is paid gross, HMRC may collect the tax due by changing the tax code on another income source, such as a workplace or private pension. This is why it is important to check if you are on the correct tax code, especially if your pension provider suddenly starts deducting more tax than expected.

Tax code mistakes can happen when HMRC uses an estimated State Pension amount, outdated income figures, or incorrect information about your other pension income.

A wrong tax code does not always mean your State Pension payment is wrong. It may mean HMRC is collecting the wrong amount of tax elsewhere.

This is where mistakes often appear. If HMRC estimates your State Pension incorrectly, uses outdated figures, or miscalculates your other income, your tax code may be wrong.

Signs your tax code may need checking include:

your private or workplace pension suddenly has more tax deducted
your tax code includes a State Pension deduction that looks too high
your income has changed but your tax code has not
you have started receiving a new pension
you have stopped work but HMRC still appears to be using employment income estimates

A wrong tax code does not always mean your State Pension payment is wrong. It may mean HMRC is collecting the wrong amount of tax elsewhere.

4. Emergency tax on pension withdrawals

People who take flexible withdrawals from a private pension can sometimes be taxed using an emergency tax code, especially on a first withdrawal.

This can lead to HMRC treating a one-off pension withdrawal as though it will be paid every month. The result can be a large overpayment of tax.

This issue is separate from State Pension forecasting, but it often affects people at the same stage of life: when they are planning retirement, accessing pension pots, or combining State Pension with private pension income.

5. Estimated income that does not match your real income

HMRC often uses estimated income to calculate tax codes. If those estimates are wrong, your tax may be wrong too.

This can happen when:

your pension income changes
you start or stop work
you take a one-off pension payment
you receive more than one pension
your State Pension starts part way through a tax year
your provider reports income changes late
HMRC carries forward an old estimate

Checking your personal tax account and tax code notices can help you spot these problems earlier.

How to check your State Pension forecast

You can check your State Pension forecast online through GOV.UK. The forecast should show:

how much State Pension you may get
when you can claim it
whether you may be able to increase it
your National Insurance record

When reviewing your forecast, do not only look at the headline weekly amount. Check the detail behind it.

Look for:

missing National Insurance years
years marked as incomplete
periods when you were contracted out
whether future qualifying years are assumed
whether voluntary contributions would actually increase your pension
whether your forecast says you can improve your amount

If you were employed before April 2016, pay particular attention to any contracted-out history. Contracting out can affect your entitlement even if you have a long work record.

Should you pay voluntary National Insurance contributions?

Voluntary National Insurance contributions can be valuable, but they are not always the right answer.

Paying for a missing year may increase your State Pension if that year counts towards your entitlement. But if you are already on track for the maximum amount, or if the missing year does not affect your calculation, paying may not help.

Before paying, check:

which tax years are missing
how much each year costs to fill
whether filling that year will increase your State Pension
how long it would take to recover the cost through higher pension payments
whether you may build up more qualifying years before State Pension age anyway

If you are unsure, contact the Future Pension Centre before State Pension age, or the Pension Service if you have already reached State Pension age.

How to check if your State Pension tax is wrong

Once you receive State Pension, check how HMRC is taxing your total income.

Start by looking at:

your PAYE tax code notice
your personal tax account
your workplace or private pension payslips
your annual pension statements
any Simple Assessment letters
your Self Assessment tax return, if you file one

Your State Pension should normally be included as taxable income. But because tax is usually collected elsewhere, the key question is whether HMRC has used the right annual State Pension figure and the right other income figures.

Check whether:

the State Pension amount in your tax code is accurate
your private pension income estimate is realistic
any old employment income has been removed
one-off pension withdrawals have not been treated as regular monthly income
your tax code reflects your current circumstances
HMRC has not duplicated income from two sources

If the figures do not look right, contact HMRC and ask for the tax code to be corrected.

What to do if you think you have overpaid tax

If you think you have paid too much tax on pension income, the next step depends on how the overpayment happened.

If you think you have paid too much tax on pension income, you may be able to claim a pension tax refund. The right route depends on whether the overpayment came from a wrong PAYE tax code, an emergency tax code on a pension withdrawal, or an end-of-year HMRC calculation.

If the tax year is still ongoing, HMRC may correct your tax code and refund some of the overpaid tax through your pension payments. If the tax year has ended, HMRC may issue a refund automatically, or you may need to claim one through Self Assessment or the relevant pension tax refund form.

If your PAYE tax code is wrong

Contact HMRC and ask them to review your tax code. You may be able to update your income estimate through your personal tax account.

HMRC can issue a new tax code to your pension provider. If the tax year is still ongoing, some overpaid tax may be refunded through your pension payments.

If you took a flexible pension withdrawal

You may need to claim a refund using the correct HMRC form.

Common refund routes include:

P55 if you have taken part of your pension pot and have not emptied it
P53Z if you have flexibly accessed and emptied a pension pot
P50Z if you have emptied a pension pot and stopped working

The correct form depends on your circumstances, so check carefully before submitting a claim.

If the tax year has ended

HMRC may reconcile your tax after the end of the tax year. If you have overpaid, you may receive a refund automatically, or you may need to claim one.

If you complete Self Assessment, you should include your pension income on your tax return and claim any repayment through that process.

If your State Pension forecast was wrong

If you believe you relied on an incorrect State Pension forecast, gather evidence before contacting HMRC or the Department for Work and Pensions.

Useful evidence may include:

screenshots or copies of old forecasts
letters from HMRC or DWP
National Insurance records
pension provider statements
records of voluntary National Insurance payments
notes of calls or written advice received
proof of financial decisions made based on the forecast

Ask for a written explanation of how your State Pension has been calculated. If you paid voluntary contributions that did not improve your pension, ask whether a refund is available.

Who is most likely to be affected?

You should be especially careful if:

you were employed before April 2016
you were contracted out of SERPS or the additional State Pension
you have gaps in your National Insurance record
you have worked for several employers
you were self-employed
you have lived or worked abroad
you receive both State Pension and private pension income
you recently started receiving State Pension
you have taken a flexible pension withdrawal
your tax code changed unexpectedly

These situations do not automatically mean something is wrong. But they do mean it is worth checking the figures closely.

How to avoid future State Pension and tax mistakes

State Pension and tax errors are easier to fix when they are spotted early. A good routine is to check your pension and tax details at least once a year, and whenever your income changes.

Before retirement, check your State Pension forecast and National Insurance record. After retirement, check your PAYE tax code, pension payslips and any HMRC letters.

You should also keep copies of important documents, including forecasts, tax code notices, pension statements and any correspondence with HMRC or DWP.

Final thoughts

The State Pension is an important part of retirement income, but the rules around forecasts, National Insurance records, contracting out and tax codes can be complicated.

HMRC tool errors have highlighted the issue, but pension tax mistakes are not limited to one system update or one tax year. They can happen whenever HMRC, DWP, pension providers or taxpayers are working from incomplete or outdated information.

The safest approach is to check your State Pension forecast before retirement, review your National Insurance record carefully, and keep an eye on your tax code once pension income starts.

If something does not look right, challenge it early. A small error in a forecast or tax code can make a big difference to retirement planning, monthly income and the amount of tax you pay.

Keeping track of State Pension income, private pension withdrawals and HMRC tax code changes can be difficult, especially when your income changes during the year. Pie helps you keep your tax information in one place, understand your tax position and stay more organised for Self Assessment. Learn more about why Pie was built to simplify tax, or download the Pie app to get started.