The UK's tax authority, His Majesty's Revenue and Customs (HMRC), has acknowledged that its computer systems have made errors in calculating tax bills, potentially leading to overcharges for thousands of individuals. This revelation came to light following an investigation into a reader's complaint that their tax liability was incorrectly calculated.
The reader, who wished to remain anonymous, reported being taxed £11.72 on dividend income because HMRC deducted savings interest from her personal tax allowance. Despite the reader and an accountant friend using specialized software which indicated no tax was due, HMRC initially maintained its calculation was correct. The reader had transferred the maximum personal allowance to her husband, reducing her own allowance to £11,310. Her savings interest for the year was £624, which is below the £1,000 personal savings allowance, and therefore should not have incurred tax.
Steve Webb, a former Pensions Minister and This Is Money's 'Agony Uncle', investigated the case. He confirmed that HMRC's initial calculation was indeed flawed. The complexity arises from the interplay of various allowances, including the personal savings allowance and the dividend allowance, and the specific order in which they are applied. In this instance, HMRC's system apparently failed to apply the personal savings allowance to the interest income first, which would have eliminated it from the taxable income. Instead, it seems the interest was included in full, reducing the remaining personal allowance and subsequently leading to a charge on dividend income.
Following Webb's intervention, HMRC admitted the error, refunded the overpaid tax, and offered £50 for 'distress and inconvenience'. In its explanation, HMRC stated that the tax calculation had not correctly applied the beneficial ordering of allowances and reliefs in relation to bank and building society interest. The authority stated that changes are being made to reduce the number of cases requiring manual processing.
Webb noted that this case was not isolated. He revealed that in the 2025-26 tax year, over 100,000 tax cases required manual double-checking because the automated system suggested that allowances might not have been applied in the most favorable order. For the 2026-27 tax year, HMRC anticipates around 20,000 such cases. While HMRC described such errors as rare, Webb cautioned that large-scale manual processing inherently carries a risk of error. He encouraged individuals, particularly those with modest incomes and untaxed savings interest, to review their tax calculations for accuracy.
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