HMRC ‘chaos’ alert over benefits U-turn | Personal Finance | Finance

The dramatic U-turn by Rachel Reeves to reinstate the winter fuel allowance for pensioners has sparked warnings of “chaos” at HMRC.

Under the new system, the payment will go out to all eligible pensioners this winter – but those earning more than £35,000 a year will be forced to repay it through the tax system.

The move, intended to save the Treasury £450million a year, is already raising alarm among tax experts who warn it could cost more to administer than it saves and lead to widespread errors, incorrect tax bills, and distress for older Britons.

Rachel Vahey, of investment firm AJ Bell, branded the plan “the most convoluted and difficult” route the Government could have taken.

She said: “Given the chaos it could cause and the relatively tiny taxpayer savings on offer, it may have made sense for the Government to take the political embarrassment of a U-turn on the chin and make the payment to all pensioners.”

Around two million pensioners are expected to earn above the £35,000 threshold and will therefore have to repay the benefit. For those who already file a tax return, the money will be claimed back through self-assessment. But most will be taxed via PAYE, meaning their tax code will be adjusted to recover the funds.

Tax expert Robert Salter, of accountancy firm Blick Rothenberg, warned: “Given that many people subject to the winter fuel payment won’t be doing tax returns, there is a real risk that HMRC might be claiming back the wrong amounts – at least in some cases – as they have used the wrong underlying data.”

Baroness Ros Altmann, a former pensions minister, echoed the concern and said many pensioners could be hit with incorrect bills.

“HMRC often makes mistakes and they warn that everyone needs to check the figures carefully to ensure the tax codes are correct,” she told the Telegraph.

“For many of the oldest pensioners, this is likely to be a massive challenge and, especially for those who are not digitally enabled, it could cause significant worry.”

Critics have pointed to HMRC’s troubled history with similar schemes, particularly the means-tested high-income child benefit system, which has left many families facing surprise tax demands.

Jon Greer, of wealth manager Quilter, said: “The Government should learn lessons from the child benefit system and ensure it doesn’t bake in unfairness from the outset. Getting that balance right is critical to avoiding the kind of unintended consequences that have plagued other means-tested benefits.”

The Department for Work and Pensions insists it will create a “simple” opt-out process for pensioners who do not wish to receive the payment.

But experts fear many will either not realise they’ve exceeded the income threshold or be unaware they need to opt out in the first place – especially those who don’t regularly deal with the tax system.

HMRC said it had “previous experience of introducing new processes at pace and doing so very successfully”.

A spokesman added: “No one will need to file a tax return just to pay back a winter fuel payment, and the vast majority will have the charge collected automatically through their tax code.”