HMRC breaks silence to 'apologise' after tax error leaves thousands worse off

A warning has been issued over a HMRC tax error that could leave thousands worse off. The Low Incomes Tax Reform Group (LITRG) warns that the error could strip self-employed workers of crucial National Insurance-related benefits like the state pension.

Voluntary Class 2 contributions are usually paid by taxpayers as part of their self-assessment return and must reach HMRC by January 31, following the end of the tax year. HMRC then automatically transfers the NICs to the taxpayer's NI record to be counted towards their entitlement to benefits such as the state pension and other employment, as well as maternity and bereavement benefits.

But this year that HMRC did not initiate the transfer until after the January 31 deadline meaning the voluntary contributions of up to £163.80 being rejected and refunded automatically to affected taxpayers, according to LITRG. An HMRC spokesperson said: "We apologise to those affected and are working to resolve this issue as a matter of urgency."

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Antonia Stokes, LITRG's technical officer, said: "This appears to be an unfortunate error by HMRC that may impact certain low-income self-employed workers who have tried to keep their entitlement to NI-related benefits up to date in the 2022/23 tax year.

"The issue is unique to the year in question, and our advice to those who might be affected is to first check to see whether they have received a refund from HMRC. If they have, or if the taxpayer is unsure, they should contact the NICs helpline to determine their position and, if necessary, make a special payment directly to them."

It comes after Sir Steve Webb warned HMRC is relying on "guesswork" over the lifetime allowance (LTA). He told the Telegraph: "The way HMRC have “solved” this problem is to estimate how much you have taken to date in tax-free lump sums based on the information you should already have kept on the total amount of lifetime allowance you had used before it was abolished.

T"o give a simple example of how this could work, suppose that the lifetime allowance was precisely £1m, and that you had used up 50pc of your allowance to date based on one or more past pension withdrawals. They would look at the £500,000 used up (50pc of the LTA) and assume that 25pc of this was in the form of tax-free cash. On this basis, they would say you have used £125,000 of your new lifetime limit for tax-free cash.

For many people this will be a reasonable enough assumption, especially for those who only accessed their pension relatively recently. However, for some people this assumption will be far too much."