I delayed taking my state pension so why have I received a tax demand for last year? STEVE WEBB replies

I am a single woman who turned 66 in July 2024 and would have been entitled to the state pension.

I opted to defer the pension as I was still in employment. In spring this year I decided to start taking it, due in part to the Chancellor’s constant attacks on pensioners.

I notified the DWP by phone. There then ensued at least 20 telephone calls, trying to sort it all out.

The request to cancel the deferral seems to have prompted the system to write to the tax office, giving them entirely erroneous information, stating that I had started taking my pension when it was initially due.

As a result, in June I received a tax demand from HMRC, claiming I owed them £2,520 for the tax year 2024-25, based on £7,960 that I had received in state pension – incorrectly, as I had received nothing.

I also received a form from HMRC with my (incorrect) tax code stating that I owed a further £600 for the current tax year.

I called HMRC but they said the DWP needs to deal with the issue and they could not accept information supplied by me.

After months of calls, which have caused me great distress and stress, having had my case escalated to so many departments, I lost the will.

I finally succeeded in getting the back-dated referral payment in two sums. I have yet to receive either an award letter or the first state pension payment.

However, the issue which affects me the most is we are now mid-way through August and the DWP still have not notified the tax office that they supplied erroneous information for both the tax year 2024-25 and for the start of this tax year. 

Until July I had not received any state pension money ever.

The result of this is that my employer has been supplied with an incorrect tax code and has deducted tax which is not due, leaving me £300-plus a month short in my monthly salary.

As I am not highly paid, this is having a detrimental effect on my income, and I am currently being forced to use my overdraft.

To compound the insult, one of my calls resulted in me being referred to the ‘hardship department’ which then sent me a text to apply for the Winter Fuel Payment, to which I am not entitled.

Does anybody there know what they are doing? All lovely people when you ring them up but no-one actually seems to take responsibility for dealing with anything, ‘escalating’ every issue to yet another faceless bureaucrat.

I am not given to crying easily, but have been very close with the sheer incompetence of this organisation.

VIDEO: You can WATCH Steve answering this week’s question – scroll down and click play 

Steve Webb replies: I was sorry to read of the stress you have faced in attempting to do something which should be straightforward – claiming your state pension after a period of deferral.

It may be helpful if I set out how things are meant to work.

One of the flexibilities built into the UK state pension system is the ability to put off or ‘defer’ taking your pension.

There’s no form to fill in to defer – you simply don’t put in a claim and your pension is automatically deferred.

A common reason for deferral is, as in your case, where someone is still in employment beyond state pension age.

They may choose to defer simply because they do not need the pension now, or because they would pay a lot of income tax on their pension if it was paid on top of a wage.

For those who retired under the old state pension system (and reached pension before 6 April 2016), there were two options for what happened when you were ready to end your period of deferral.

The first option was simply to take an enhanced pension for the rest of your life. The old system offered a generous (10.4 per cent) uplift for each year of deferral, making this an attractive option for some.

The second option was to receive all the ‘missed’ pension in the form of a lump sum, plus a small amount of interest. This lump sum was taxed at your marginal rate of income tax in the year in which you received it.

With the advent of the new state pension, the second option – of taking a lump sum plus interest for all the missed pension – was removed.

Under the new system you can simply take your pension at an enhanced rate – an extra 5.8 per cent for each year you delay.

In this case the tax position is simple – your (enhanced) state pension is added to your wage and other taxable income and taxed in the current financial year in the normal way.

However, rather confusingly, there is still a way in which you can get a lump sum. This is by *backdating* your claim for up to 12 months.

If you are ready to take your pension but tell DWP you want to backdate the start date of your claim, they will pay you a lump sum from the start of the claim to the present date.

It looks to me as though this is what has happened in your case – albeit with considerable delay in processing your application.

The crucial point here is that the income tax system taxes these lump sums on the basis of the period when you became entitled to the pension and not when you actually received it.

This is known as the ‘accruals’ basis, and more information can be found on the gov.uk website here: EIM75020 – The taxation of pension income: pension payments made in arrears or in advance.

In your case, by backdating the start of your claim to the 2024/25 tax year, HMRC are now – correctly – treating you as if you had received your pension as soon as you reached pension age.

You mentioned that you have now received your state pension as a lump sum of over £10,000, and most of this will be for the period from your pension age in July 2024 to the end of that financial year in April 2025.

I’m afraid you will therefore have to use part of your £10,000-plus lump sum to pay that tax bill.

In terms of the current financial year, HMRC are treating you – correctly – as if you had been getting a regular pension since the start of this financial year.

But you have not so far been paying tax on that basis, so they have used the tax code applied to your wages to collect the tax you should have paid so far in 2025/26.

I should stress that your state pension (which I hope you have received by now) is always paid gross – that is, before the deduction of income tax.

Any tax due on that pension plus your wage (less your personal allowance) is collected via a tax code through your payslip.

I hope that this helps to explain what happened.

Interestingly, yours is the second message I’ve had in a few weeks on this exact topic.

In my view DWP should be doing more to explain to people who backdate their state pension claim that this could lead to a tax liability for the previous financial year, rather than leaving you to find out the tax implications for yourself.

The DWP and HMRC were asked for comment but did not respond in time before publication.