Underpayments of State Pension - who is affected and how much will they receive?
The Office for Budget Responsibility (OBR) Economic and Fiscal Outlook, published on 3rd March, said the Department for Work and Pensions (DWP) had identified underpayments of State Pension relating to entitlements for certain married people, widows and over-80s back to 1992.
Who is affected?
The underpayment primarily affected married women whose husbands reached State Pension age before 2008 and who were unknowingly entitled to ‘enhanced pension’ that would have boosted their payments by up to 60 per cent. This was due to an administrative error blamed on a glitch in the DWP’s IT systems.
However, the investigations found there is a broader group of people affected which is perhaps less well-publicised.
Those affected have been categorised into the three groups by the DWP. We have added the notes in italics to explain each category.
DWP groups affected:
People who are married or in a civil partnership who reached State Pension age before 6 April 2016 and may be entitled to a Category BL uplift based on their partner’s National Insurance contributions.
The Category BL uplift refers to the entitlement for women of 60% of the basic state pension their husband gets at State Pension age (under the old pre-2016 State Pension system).
For 2020-21, the full Basic State Pension is £134.25 per week and the rate for married women claiming on this basis would be £80.45 per week. Women could claim this if they hadn’t built up a greater entitlement on their own National Insurance record.
For anyone reaching State Pension age after April 2016, a new single-tier State Pension exists and this old rule for married women has been abolished. But those who were entitled to it in the past and who never received it will benefit from it now following the DWP’s investigations.
People who have been widowed and their State Pension was not uplifted to include amounts they are entitled to inherit from their late husband, wife or civil partner.
If you’re a widow or widower, you could substitute your late spouse’s National Insurance record for your own, thereby qualifying for a higher State Pension.
People who have not been paid ‘Category D’ State Pension uplift as they should have been from age 80.
This refers to the over 80 pension, which is a State Pension for people aged 80 or over who receive less than £80.45 per week (based on the 2020/21 tax year rates). If you receive less than this amount, your State Pension could be increased to match this.
How much State Pension back-payment will people receive?
A repayment programme began on 11th January 2021. The plan is still subject to a high degree of uncertainty as the true extent of the underpayment is not yet established. However, the OBR lays out a costing plan for the government as follows:
2020-21: £120million
2021-22: £670million
2022-23: £625million
2023-24: £635million
2024-25: £535million
2025-26: £390million
It’s estimated that the average back-payment will be in the region of £13,500 per person.
How much tax will have to be paid on the back-payment?
State Pension is taxable, although no National Insurance is payable. If you receive a large underpayment, then you may need to fill in a self-assessment tax return.
If you receive a large amount of backdated pension this could, if treated in full as income in the year you receive it, be taxed at a higher rate than if you had received it in the year it should have been paid.
This does not seem fair, especially if no tax would have been payable if the right pension had been paid at the right time.
We will have to see what view HMRC takes, and test cases may be the way forward. But accounting for tax on any back-payment would be a sensible course of action.
How will the underpayments be corrected?
Where underpayments are identified, the DWP will contact the individual to inform them of the changes to their State Pension amount and of any arrears payment they will receive in accordance with the law.
In a statement published by DWP on 4th March, they said:
The government is fully committed to ensuring that any historical errors, unaddressed by previous governments, are put right as quickly as possible.
How we can help
If you would like to speak with someone about your pensions or broader finances please get in touch and one of our Financial Advisors will be happy to help. An initial conversation is at our cost.
Please note this article offers information about financial planning and should not be taken as personal advice. Tax rules can change and the benefits depend on individual circumstances.