Upset relatives grieving the loss of a relative who has died in the last month have been wrongly taxed on inherited pensions due to an error by HMRC. An error within the HMRC systems has led to the families of people younger than 75, who died since April 6th, having their ‘death benefits’ taxed at the wrong rate, overcharging them by thousands of pounds. This is despite the tax that no tax is actually due, as new rules were previously introduced under the pension reform, which allow anyone who dies under the age of 75 to pass on their retirement fund tax free.
Several pension companies including LV= and MGM Advantage said that relatives of customers who were deceased had received letters from HMRC saying that they were being taxed- the letters were incorrect and luckily, the companies had managed to act quickly enough to prevent any tax being deducted wrongly from payments.
However, one pension company said that hundreds of relatives of deceased customers’ had been taxed by mistake. This led industry experts to claim that this discovery could be the ‘tip of the iceberg’. Last week, some of the biggest pension companies’ such as Legal & General and Prudential said that they would not be disclosing whether some families had paid too much tax. In a bid to stop the issue before it goes any further, pension providers have been told to stop reporting death benefits to HMRC until the system error has been fixed. However, some providers issue the information automatically and are unable to stop it.
A spokesperson for the pensions provider Hargreaves Lansdown said that it is ‘critical’ to get the tax right, but it is unlikely to be just one provider who has been affected by the error. Similarly, the Chief Operating Officer for LV= said that they had heard from customers who had received an incorrect tax code from HMRC, but they were able to ensure that they weren’t affected by the error. Lastly, he said that the customers were already dealing with the loss of a loved one, so did not need to be dealing with tax issues too.
A representative from the Association of British Insurers said that they had informed HMRC it may be impossible for some providers to stop providing the information. He said that they had been working alongside HMRC to find a solution to the problem.
A spokesman from HMRC denied that anyone had been affected by incorrect tax. They said that individual pension providers are responsible for operating a PAYE system and are required to treat such payments as tax free.
For more information on inheritance tax, contact HMRC.