The National Audit Office estimates that by March this year 1.5 million older people had overpaid tax by an average of £171 while around 500,000 older people had underpaid £100m worth of tax or £207 each on average.
The NAO blames HMRC’s systems, which it says are failing to cope with pensioners having multiple sources of income.
The NAO says these errors can have a disproportionate effect on older people as their net average annual income of £16,000 was around 25 per cent below the national average in 2006-07.
The report, HM Revenue and Customs: Dealing with the tax obligations of older people, also estimates that some 2.4 million older people have paid around £200m more in tax because they did not have their savings income paid gross.
Pensioners may also be paying more tax because they do not claim additional age-related tax allowances.
The NAO estimates around 3.2 million older people do not claim additional allowances, many because they do not realise they are entitled to them. Claiming these allowances would boost the average income of an older person by up to 4 per cent, according to the report.
The NAO has called on HMRC to rethink its approach to ensure pensioners get the financial support they are entitled to as demographic changes are likely to increase the Revenue’s costs and the pressure on its systems.
It should also work in a more joined-up way with other organisations to provide a more coherent service for older people on their tax affairs, the organisation says.
National Audit Office head Amyas Morse says: “Older people want to pay the right amount of tax but too many pay more than they need to because they do not claim allowances to which they are entitled 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. A win-win situation for all.”