Reader’s Question: PAYE Tax Code error – can HMRC force me to pay back underpaid tax from 2008?

Reader Question:

I've just received a bill from the Inland Revenue saying that an incorrect amount of state retirement pension was included in my tax code for the year 2008-9 and as a result I have underpaid tax by £485 for that year. This is totally their error - do I legally have to pay this? - many thanks

My response:

To fill gaps for other readers. In the last 12-18 months HMRC has been embroiled in a number of blunders resulting in millions of people either overpaying or underpaying income tax in previous tax years, via Pay as You Earn (PAYE), going as far back as 2007.

Back in September 2010 HMRC started chasing underpayments for the tax years 2008/09 and 2009/10. The result was that:

• If people had overpaid income tax then HMRC sent out a cheque out to reimburse them
• For those who underpaid tax by between £300 and £2,000 (such as you) HMRC agreed to 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 the average underpayment of £1,428 this will mean a drop in the average take home pay of around £100.
• The good news is that if for those owing less than £300 in underpaid tax HMRC simply wrote it off
• However, if the underpayment was £2,000 or more then HMRC could demand that it be paid back in full via a lump sum.

So do you have to legally pay back any underpayment?

Yes and no.

I suppose some would argue why should people be allowed to have their unpaid tax liability written off, when they themselves had to pay the full rate of tax. But while legally you do have to repay any underpaid tax when HMRC demands it there are some caveats.

According to the Low Income Reform Group, in January ''the Government announced that some 250,000 pensioners will not have to repay tax underpayments that accrued during 2008/09 and 2009/10 because the PAYE system failed to tax their state pensions correctly.''

Strangely it would appear you do not fall into this category? But there is another limited circumstance under which you may be able to avoid d paying back the money. A procedure called the extra statutory concession allows HMRC to write off tax, if it was provided with all your relevant information but failed to use it within 12 months of the end of the tax year in which the information was received. "In these 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''. (source BBC).

What else should you 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.

One thing I would say is that you should call HMRC and check that the letter you have received is genuine - as there have been some fraudulent versions circulating.

For more information on what to do if you are faced with a PAYE tax bill, particularly if you can't afford to pay it then visit the Low Incomes Tax Reform Groups's website. They even provide template letters for you to challenge the repayment.

I hope that helps

Best Wishes

Damien

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