UK Tax News from TaxPenny

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HMRC finally reveals the total cost of errors that we first reported on starting from February 15th this year.

Between January and March 2010, 25 million new tax coding notices were issued for people paying tax through the PAYE (Pay As You Earn) scheme. HMRC issued a press release stating that due to the shift to a new computer system these notices were possibly incorrect where the taxpayer previously had more than one income source - leading to a tax code being generated based upon two combined incomes - resulting in a lower than standard personal tax free allowance.

Following on from this release, another statement from HMRC on the 15th of August about 15 million people being on the wrong tax code was issued. This also stated that £238 million had possibly been overpaid in tax by the people affected.

This weekend it has emerged that about £2 billion in tax was underpaid via the Pay as You Earn (PAYE) system in the past two years, with around 1.4 million people owing an average of £1,500 each.  The same errors have resulted in £1.8 billion of overpaid tax and nearly 4.3 million people will get a tax refund because they have paid too much.

Normally any tax adjustments are made by submitted a tax return at the end of each tax year - you can adjust your allowances based upon your total gross income and claim any allowable tax reliefs also. If however an error has been made through the use of a wrong tax code or tax relief is to be claimed in other circumstances, the onus is upon the taxpayer to submit a claim and follow this up with HMRC to completion - providing evidence where applicable.

Due to the extraordinary volume of errors that have been discovered, HMRC are to change course and millions of letters will be sent to taxpayers across the UK informing them of errors in their contributions.

This Tuesday, the first 45,000 will land of which two-thirds will have the good news of a refund (average £418) and one-third (15,000) people the bad news of tax underpayment.

Those that have underpaid tax due to these errors will have their tax code altered next tax year to recoup the money.

Some people may have underpayments as well as overpayments - effectively cancelling any action.

As we reported before, these discrepancies occur where individuals have more than one source of income and the tax codes issued are incorrect.

These errors were picked up when the amounts deducted in tax and National Insurance by employers using the PAYE system did not match the information held on HMRC records.

HMRC confirmed if taxpayers can demonstrate they provided all the information necessary to calculate their tax correctly they may consider writing off demands for repayment of underpaid tax.

Treasury minister David Gauke said “At the moment we have said that those who owe more than £2,000 - those who are obviously in the most difficult position - we’re reviewing exactly how we’re going to do that.  For those who owe less than that we will be seeking to recover that over the course of the 2011/2012 tax year through tax codes.”

In June, the government ordered a review of how the PAYE system works and is encouraging the public to contribute their thoughts about how it could be improved.

If you are concerned about your tax payments - use our free tax calculator website - you will be able to accurately calculate tax going back to 2003. This will check if your tax codes are correct and notify you of any mistakes and the amounts.

If you have more than one source of income, you can repeat calculation for two income sources and the tax codes will be checked for you. Check your tax codes now.