Stop the huge tax blunder hurting you

HM Revenue & Customs is doing a pretty appalling job of collecting our taxes. Will you be one of the six million affected?

You can’t fail to have noticed the huge furore surrounding HMRC’s latest tax calculations. A new system for collecting Pay As You Earn (PAYE) tax is bulk issuing computer-generated calculations for the very first time for the 2008/2009 and 2009/2010 tax years, and while it’s necessary for the revenue to drag its processes into the 21st century, errors are surfacing in their millions.

Six million to be exact!

Unfortunately, an estimated 1.4 million people will receive a letter before the end of the year to say they have underpaid tax during the last two tax years. And the government has been quite clear in its intention to claw back as much of the underpaid tax as possible.

In some cases the blame lies with the Revenue’s failure to act on information already in its possession about changes to your employment. But many employers and pension companies, who pay benefits to retired people, have also been handling the PAYE system incorrectly leading to underpayments or overpayments of tax.

Checking your tax code

If you haven’t already had a letter year but you’re concerned you might - this is more likely if you have had more than one employer or you have started taking pension benefits over the period in question - you could pre-empt matters by checking your tax code now.

Your tax code is a very important piece of information since it tells the Revenue how much income you can earn before tax becomes payable. 2010 has certainly been a year of tax coding errors which has played merry hell with our tax liabilities.

If your tax code is wrong - which can happen more easily when you change jobs, are awarded a pay rise, start to receive benefits in kind or start taking pension benefits - it’s pretty much guaranteed you’ll either pay too little or too much tax.

So, how can you check your tax code is correct?

Your tax code will be included on your P60 although it may also be shown on your monthly pay slip. But what should it look like? One of the most common codes is 647L. This is the code you should have if you’re under 65 and you’re entitled to receive the full personal allowance for the 2010/2011 tax year - which is £6,475. The personal allowance is the amount of income you can earn tax-free.

Other tax codes may apply depending on your own circumstances. For example, if you receive certain benefits in kind from your employer, such as private medical insurance policy, your tax code will likely alter and your personal allowance you qualify for may reduce as a result. Make sure you check out the tax code information on the HMRC website to help you calculate what your correct code should be.

Dealing with underpayments

If you do receive letter from HMRC alerting you to a tax error, make sure you read Tax code error in your favour: Collect £££. This article provides a good overview of how you should deal it.

Of course, there’s no problem if you’ve overpaid tax since a rebate will be sent to you as a one-off payment or will be dealt with by adjusting your PAYE tax code. (Although, with the second option it’s worth checking the new tax code you’re given is correct too.)

If it turns out you’ve underpaid, and therefore owe the Revenue, your tax code will be altered in the new tax year (starting from 6 April 2011). Effectively, the new tax code will reduce your tax-free personal allowance to a level which enables the Revenue to take back the amount of underpaid tax. This only applies where you owe less than £2,000. If you owe more than £2,000, you’ll be ask to repay it in a lump sum.

Recent question on this topic

• Stargazer asks:

  Will the reported errors at HMRC affect those on self-assessment?

  • 
    JoeEasedale answered "That is how I read it. Also, if people who are on paye have checked their notice of coding each..."
  • 
    Stargazer answered "Many thanks, JoeEasedale - that's how I interpreted the headlines too. Was just checking that..."
  • Read more answers

But there has been some better news in amongst all this: Speaking at the House of Commons yesterday, (9 September) David Gauke MP announced HMRC would not try to recover smaller underpayments of less than £300. This will come as a relief to some of you.

But what should you do if you think HMRC is trying to claim tax back from you when you’re convinced you’re completely up to date? You have every right to dispute the decision in this instance. It’s a good idea to contact the Revenue in writing to explain why you believe your tax calculation is incorrect. To help you provide the right information, refer to these letter templates from the Low Incomes Tax Reform Group. (You’ll find the templates on pages 11 - 14).  

Be on your guard

Finally, I’ll leave you with a warning: This whole exercise could leave us all wide open to yet another taxman scam. This con trick is actually pretty straightforward, and involves the scammer managing to wheedle your bank details and personal data out of you by convincing you you’re entitled to a rebate. But instead of getting some tax back, your bank account is emptied.

These scams are normally carried out by email or phone, but always remember this: HMRC will only ever contact you about a tax calculation by post. If contact is made in any other way, the alarm bells should start ringing loudly.

Fraudsters may see this as a golden opportunity to fleece you, so please be on your guard.

More: This tax error could cost you thousands | Beat the VAT hike!