PAYE tax error – The facts

All your questions answered including what you can do if you’re affected.

The problem

• It has emerged that nearly 6million people have paid the wrong amount of tax via Pay As You Earn (PAYE), stretching as far back as April 2008.
• The majority of those affected people are due a tax refund worth on average £420.
• But 1.4 million people have underpaid and HMRC will need to recover on average £1,428 from each person who falls into this category.

How do I know if I’m affected?

• HMRC have started sending letters (called a P800) out to the 6million people affected by the error. This process will take until Christmas – so you may have a wait on your hands. But those most likely to be affected are people who had a number of different sources of income or changed jobs in the last two years. If your circumstances haven’t changed, or you filled out a self assessment tax return in theory you ought to be ok.

If I receive a letter what happens next

• If you’ve overpaid then HMRC should send you a cheque within 14 days of receiving their letter.
• For those who have underpaid tax by between £300 and £2,000 HMRC will rectify the situation via PAYE in 2011-12 by amending people’s tax codes.  This will mean that their net monthly pay in 2010-11 will reduce, so spreading the bill over the whole year. Assuming an average underpayment of £1,428 this will mean a drop in your take home pay of around £100.
• The good news is that if you owe less than £300 in underpaid tax HMRC will simply write it off and you will not even receive a letter
• However, if your underpayment is £2,000 or more then HMRC could ask you to pay back the full amount in one lump sum.

But I can’t afford that what should I do?

If you truthfully can’t afford top pay then HMRC suggest that individuals get in touch with them in the first instance to explain their circumstances.  However first things first, satisfy yourself that facts contained within HMRC’s letter are correct and notify your tax office of any mistakes.

I’ve heard that I can get the tax bill written of, is this true?

Yes but only in limited circumstances.A procedure called the extra statutory concession allows HMRC to write off tax, if it was provided with all the relevant information but failed to use it within 12 months of the end of the tax year in which the information was received. "In those cases where HMRC had all the information needed and the taxpayer could reasonably have thought they were being accurately taxed, [but] an underpayment has still arisen, it can be written off," said an HMRC spokesman. (source BBC).

But if you do owe tax and you want to appeal then do so promptly before your employer deducts what you owe from your pay. Otherwise you will be fighting to get your money back.

What else should I do?

While you would hope the tax system works efficiently this saga highlights that it clearly doesn’t. It is important to keep on top of your tax bill even if you pay income tax via PAYE. If for no other reason than to ensure that you are not paying too much tax.

Hence it is important to check your PAYE tax code is always correct. It won’t take a minute to do so – simply follow my post Money tip #4 – Check your tax code

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