When the Revenue Commissioners started posting letters in January to tens of thousands of pensioners telling them they could have an outstanding tax liability, there was, understandably, both anger and confusion on behalf of the recipients.
The majority of people assume that whether it is their monthly paycheque or their pension, tax is being collected correctly through the payroll or tax credit system.
Put very simply, tax credits are issued to each employed individual at the start of each tax year.
For the 'standard' person working for an employer with no other income other than your monthly paycheque, for 2012 they are entitled to a personal tax credit of €1,650 and a PAYE tax credit of €1,650 also.
Self-employed people do not receive the latter credit as they are generally entitled to claim more expenses against their employment income.
Getting back to the pensions, people were under the impression that the old age pension was not taxable, and that as a result of these letters from the Revenue Commissioners, it suddenly has become taxable.
This is a misunderstanding on behalf of many.
The old age pension (also applicable to anyone on Job Seeker's Benefit) is actually treated as taxable income, but for an individual with the pension as their sole income, the tax payable is covered entirely by the yearly tax credits.
Thus the impression given is that it is tax free income, whereas this is incorrect.
The main reason behind the tax becoming payable on some of these pensions is that pensioners are in receipt of not only the State pension but also income from a private pension.
What was highlighted in January, is that the tax credits were allocated between these two pensions incorrectly.
As a result, the amount of tax that had been collected was less than should have been paid.
As mentioned previously, at the start of the year every person working for an employer will receive what is called a 'Notice of Tax Credits & Determination of Standard Rate Cut-Off Point'.
While rather ominously titled, all this page does is show what tax credits you are entitled to and what amount of income is going to be taxed at 20pc and 41pc.
In a similar vein to what has happened with the recent pension debacle, it is vital to ensure that the details included on this notice are up to date and correct.
The people who process the payroll in an office use this notice to calculate an employee's take home pay, by taking the various entitlements to tax credits and how much of the income is taxed at the various rates.
As a rule, the figures contained in this notice are not questioned by the payroll department, and I have many times seen that the notice was based on the individual's circumstances that pertained a number of years ago.
As a result, at the end of the year where a tax return may have to be filed, perhaps in order to claim a refund of medical expenses, it can actually transpire that not only is a refund not due as it should be, but rather tax is payable as a result of too much tax credits given each month resulting in 12 months of underpaid tax.
As is evident from tthe media coverage of the Revenue letters issued to the 115,000 pensioners, it is vital that each person goes through their tax credit notice each year to ensure it is correct.
This is far more beneficial than having to pay a large lump sum of tax the following January.
Simon Ball is the founder of SB Tax Consultants and an Associate of the Irish Taxation Institute. www.sbtaxconsultants.com