How does HMRC treat the tax on these arrears?
In August 2020, the Department for Work and Pensions (DWP) began to make state pension arrears (SPA) payments to individuals who had been underpaid. This work will continue until December 2024.
The tax treatment
HMRC will be assessing affected self-assessment clients to establish if additional tax is due. HMRC will only collect income tax for the current tax year and the previous four tax years. An HMRC team will assess these cases from 11 April 2023 and issue letters to taxpayers who have an additional tax liability. A copy of the letter will also be issued to authorised agents.
Deceased taxpayers
If the monies were paid to the person while they were alive then they just become part of their estate, which is declared for probate.
Customers who passed away before the date DWP paid the arrears will not be charged tax. HMRC will not collect income tax on state pension arrears payments in cases where the individual, entitled to the arrears of state pension, is deceased at the point DWP make payment of the arrears. In addition, the right to the payment will have no value for IHT and will not need to be disclosed to HMRC.