Millions of pensioners are paying too much tax because the system is so complex, the National Audit Office (NAO) said today.

Some 1.5 million older people over-paid income tax by March this year due to processing errors, while about 3.2 million were failing to take up their allowance entitlements, the watchdog found (see the Benefits Check-up guide).

It also estimates 2.4 million fail to claim back tax deducted from their savings interest earned (see the Top Savings guide).

It said the average income tax overpayment was £171, having a disproportionate effect on a group whose typical income is just £16,000 (see the State Pension Boosting guide).

There are also 500,000 older people who had underpaid tax, by an average £207.

The NAO says errors occurred because pensioners' tax affairs are more complicated than for the rest of the population, and HM Revenue and Customs (HMRC) struggled to cope.

It adds that older people are less likely to seek help from HMRC, even though 36% did not understand their tax liabilities.

It urged the HMRC to "rethink its approach to ensure older people get the financial support they are entitled" and work with other departments to provide a "more coherent" service.

Amyas Morse, head of the National Audit Office, says: "Older people want to pay the right amount of tax but too many pay more than they need because they do not claim allowances, and because of errors.

"By providing a more coherent service, HMRC could make substantial savings as the number of enquiries from older people about their tax affairs would reduce."

An HMRC responds: "We are determined to reduce over and underpayments. During the last few months, we have significantly upgraded our computer systems to improve accuracy and deliver a better service to older taxpayers.

"We will shortly launch a publicity campaign designed to encourage older taxpayers to reclaim tax and have their investment income paid tax-free.

"We will also look at ways of encouraging better take-up of age-related tax allowances."

Further reading/Key links

Boost income: Benefits Check-up, State Pension Boosting, Top Savings