Incorrect tax codes cause concern

15 February 2010

HM Revenue and Customs (HMRC) has responded to worries that a proportion of the new tax codes that are currently being issued may be incorrect.

The Chartered Institute of Taxation (CIOT) has warned that a significant number of the 25 million tax coding notices that are being sent out this year by HMRC may be incorrect.

The codes dictate how much employers and pension firms deduct in income tax for the coming 2010/11 financial year.

The CIOT said that the figure of 25 million is double the number sent out last year, and that the wrong information could cost individual taxpayers up to £108 a month in incorrect charges.

That a proportion of the tax codes are incorrect is down to an error in the new PAYE system, the CIOT explained.

A number of people with one job are receiving two (or more) tax coding notices with different codes. This, the CIOT said, is because the new system is failing to distinguish between current and previous jobs.

The system combines information on NICs and PAYE details for the first time. But in some instances, the database may not have the correct information on those taxpayers who have moved from one job to another recently, treating them as if they are in more than one job.

This may mean that some taxpayers could see their personal allowance divided between two alleged jobs or assigned to a job they no longer hold, obliging their employers to deduct an excess amount of tax.

“The personal allowance will be £6,475 for most people under 65 in 2010-11,” said the CIOT. “If the whole of that personal allowance is wrongly applied that would cut a basic rate taxpayer’s pay packet by about £108 a month or £1,295 a year.”

HMRC offers advice

Responding to the concerns, HMRC has now published guidance on the matter.

HMRC reassured that the vast majority of notices will be correct but added that there will be cases where, because the data carried over from the old system does not match employers’ data, some people will receive an incorrect coding notice or more than one coding notice for the same employment.

HMRC continued that it is aware of the issue and has apologised for any inconvenience caused. The tax authority added that there is plenty of time to put the codes right before the start of the tax year.

Anyone who is concerned that their code may be wrong should check it using the guidance on the HMRC website at http://www.hmrc.gov.uk/incometax/tax-codes.htm

If that doesn’t resolve things, taxpayers can call 0845 3000 627 so that the right tax code is in place for the start of the new tax year on 6 April 2010.

Andrew Hubbard, the CIOT’s president, said: “Most people on PAYE are used to assuming that what the taxman sends them is correct. Many file away coding notices without even bothering to check them.

“But this year, many of them are being given wrong information, and unless they spot it and tell HMRC, their employer will receive the wrong information too, and they could get a nasty shock when they open their April pay packet and see it is as much as a hundred pounds lighter than they are expecting.”

Mr Hubbard added: “The new PAYE system is potentially very good and this is really just a teething problem – but a serious one.”

P2 notices, which contain tax code information, are being sent out between the first week of January and the first week of March. They go first to individual taxpayers in order for a check to be made before they are sent on to their employers.

Consequently, taxpayers have only a limited amount of time in which to identify and point out any errors before employers are informed of their employees’ tax codes in P9 notices which are issued during March.