Families affected by the National Savings and Investments scandal could be hit with unexpected tax bills when they finally get money that was wrongly withheld, Labour has admitted.
This is because returning the money can increase the total value of a deceased person’s estate, which could push it into a higher tax bracket or trigger inheritance tax.
Although the tax applies to the estate, it is the families receiving the money who would ultimately feel the financial impact.
Pensions minister Torsten Bell told the Commons: "We also recognise there may be tax implications for affected estates and want to avoid bereaved families facing disproportionate disruption and administrative costs as a result of this error."
The scale of the operational failures is substantial, with Mr Bell revealing that 37,500 beneficiaries of deceased NS&I account holders had been denied a total of £476million.
These systemic problems at the state-owned savings institution stretch back to 2008, according to investigations that uncovered lost investments, delayed payments and withheld premium bond winnings.
While the minister maintained that taxpayers would not bear the cost of compensation, he acknowledged the Government was examining what assistance could be offered to affected families.
"We are exploring what support can be provided and will set this out alongside [the] NS&I delivery plan in May," Mr Bell stated.
The minister outlined three immediate priorities: halting ongoing problems, returning funds to rightful beneficiaries, and implementing fundamental institutional reform at NS&I.
NS&I scandal victims face double blow
| GETTYDax Harkins was dismissed from his role as NS&I chief executive during a meeting with Treasury officials this week, following the exposure of these widespread failings.
Sir Jim Harra, formerly head of HMRC, has been appointed to lead the organisation on an interim basis.
Mr Harkins had joined NS&I in the sales department and risen through the ranks before taking the top job in April 2023, earning more than £300,000 annually in salary and pension benefits.
Some families were compelled to engage solicitors simply to recover money that belonged to them after the bank lost track of their accounts.
NS&I scandal victims face tax hit on £476million repayments
|GETTY/NSI
In one instance, NS&I had to reimburse a family for legal fees and tax interest after misplacing two accounts connected to an investment portfolio.
A widower was denied premium bond prizes owed to his late wife's account due to telephone system failures.
Andrew Griffith, the shadow business secretary, called for ministers to recover bonuses paid to NS&I executives following what he described as an "epic failure".
He said: "This failure raises questions about the Treasury's own supervision including what they have done since being informed on Dec 18, 2025 and the Telegraph breaking this story this week."
Some families were compelled to engage solicitors simply to recover money that belonged to them after the bank lost track of their accounts
| GETTYMr Griffith argued there should be "no rewards for failure" and urged the Government to use clawback provisions against the chief executive and senior management.
He criticised the organisation for failing to deliver straightforward savings products that private sector competitors could have managed far more efficiently.
NS&I, originally established as the Post Office Savings Bank in 1861, currently manages £240billion on behalf of approximately 24 million customers and has apologised for its failings.