Savers have been told to check their tax bills after HM Revenue and Customs suffered a system error, leading to them being overcharged.
The glitch means that savers are not having their tax-free allowances applied. Basic-rate tax payers can receive £1,000 a year on interest tax free, while most higher-rate earners get £500. Earners over £125,140 get no allowance.
The problem affects about 3,500 cases a year, which the tax office says it reviews, but some savers are not having their allowances applied and others are being charged too high a rate on dividend income, The Telegraph found.
Mike Warburton, who discovered the issue, said: “I remain concerned that thousands of people with savings and dividends may have been caught out by this, possibly for several years.”
Pensioners are often hit by this problem since their income can come from dividends and interest from stockholdings and savings, whilst also being low enough to receive the personal tax allowance.
HMRC said: “We have thorough processes in place to ensure customers fully benefit from any allowances or nil-rate bands they’re entitled to, provided we’re given the right information.”
Fiscal drag, where tax allowances have been frozen or, in the case of the dividend allowance, cut from £1,000 to £500 in April, has meant more people have been dragged into higher tax brackets.
The state pension is now £11,975, while the tax free allowance on earnings is only slightly above that at £12,570, meaning most pensioners end up paying income tax.
It comes amid other cuts to pensioners’ incomes.
Ministers also fear up to 120,000 of the most vulnerable pensioners will miss out on money to pay their winter fuel bills after Chancellor Rachel Reeves stripped the payment from millions of older people.
The government is to write to the group next month to warn them they will lose out unless they apply for pension credits before Christmas.
But many face months-long delays in processing forms, meaning they still may not receive the cash this winter, The Independent revealed this week.
Ministers have defended the change, saying they have to “get the money from somewhere” and blaming the last Conservative government for leaving a £22bn black hole in the public finances.
But they have urged less well-off pensioners to apply for pension credit, under which they would still be eligible for the £200-300 winter fuel payment, designed to help with heating costs during the colder months.
Out of around a million older people on housing benefit, the government will tell more than 100,000 of them they could still receive assistance with their heating bills.
