HMRC has revealed that millions of people received incorrect tax codes over the past two years. 4.3 million ended up paying too much and will receive a refund, but 1.4 million paid too little and will face an unexpected tax demand. The average bill could be £1,500.
Those affected have had tax deduced from their earnings under Pay As You Earn (PAYE). Where an incorrect tax code has been found to leave underpaid tax, HMRC now intends to claw this back.
Unexpected tax bills
People who are deemed to have paid an incorrect amount of tax will receive a P800 Tax Calculation form from HMRC. For over 4 million this will bring welcome news of an unexpected refund. Less glad tidings will be received by 1.4 million people who have underpaid.The total shortfall is around £2bn, giving an average demand of £1,500. Errors in tax codes are normally caused by people moving jobs or having more than one job at the same time. Those who receive taxable benefits from an employer, such as a car or health insurance, may also fall foul of the PAYE system. For more information see Tax Codes Explained on the Which? website.
Time to pay
If you owe money as a result of HMRC’s error, you do not have to pay it all back at once. Most people will be asked to pay additional tax each month, from the start of the new tax year in April 2011, arranged, ironically, by an adjustment in their PAYE code. Interviewed about the demands, Treasury Minister, David Gauke, was clear that this would give people time to make the necessary payments.
Possible tax loophole
Although most people with a shortfall will have little option but to pay up, the Chartered Institute of Tax’s Low Incomes Tax Reform Group has pointed out a possible respite for some. HMRC are meant to act on information received about your finances within a year of receiving this. If the demand relates to tax due for 2008-9 and you can show that you supplied the necessary information on time, you may be able to get the extra tax due written off. This is possible under Extra Statutory Concession (ESC A19).
The CIOT Low Incomes Tax Reform Group has published an online guide to PAYE underpayments and repayments.This provides step-by-step advice for those who receive a tax letter from HMRC. Welcoming the guide’s timely publication, Which? tax writer Ian Robinson said: ‘For anyone worried about a demand for unexpected tax, this is a very reassuring and helpful resource’.
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