Page last updated at 20:02 GMT, Monday, 25 January 2010

Warning to taxpayers to check tax codes

HMRC tax form
Millions will need to check their coding notices carefully

Incorrect tax codes may have been sent out by HM Revenue & Customs (HMRC) because of a new computer system.

The codes tell taxpayers how much their employers and pension firms will deduct in income tax in the coming financial year, 2010-11.

The Chartered Institute of Taxation (CIOT) says taxpayers could be asked to pay up to £108 a month too much.

The Revenue said it had no evidence of a widespread problem but advised taxpayers to check carefully.

"There will be some incorrect tax codes as there always are at this time of year," said an HMRC spokesman.

"But the coding notice tells people what the code relates to and tells them to contact us if it is wrong," he added.

'Nasty shock'

The CIOT has called on the Revenue to launch a publicity campaign to alert taxpayers to the potential problem.

"Most people on PAYE are used to assuming that what the taxman sends them is correct," said Andrew Hubbard of the Chartered Institute of Taxation (CIOT).

Sam is aged 45, is earning £12,500 for 2009/10, and has no other income
His personal allowance is £6,475
Subtract the £6,475 from the £12,500 and so the income Sam pays tax on is £6,025

"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.

"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," he added.

It is not clear how many incorrect tax codes have been sent out, or may be distributed in the coming weeks.

The CIOT said the scale of the problem might be indicated by the fact that this year about 25 million coding notices are being distributed, which is about twice last year's number.

The Revenue explained that the increase was a natural feature of the new system.

"It creates a single record for customers for the first time, and this, together with increased automation compared to previous years, is resulting in many more people having more accurate codes than before," the spokesman said.

Computer problem

The codes have been sent out in batches in a process that started in the first week of January and which ends in the first week of March.

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

They go first to individual taxpayers in a P2 notice for them to check, before the code is sent to their employer.

However some people are receiving two or more more coding notices which are different.

Nick Brand from Fareham in Hampshire, who works full time for a supermarket, told the BBC this had happened to him.

Last year he did a day and half's work for a friend's IT firm, earning £150 declared as required via a P46 form.

Last November he was sent two coding notices, allocating £1,318 of his annual allowance to the income from his temporary work, and allocating the remaining £5,157 to his main job.

That has been repeated in the two coding notices he received on 3 January for the 2010-11 tax year, even though he has no intention of repeating last summer's temporary work.

"It's not good, at the end of the day you pay too much tax," he said.

New system

The problem appears to lie with a new computer system designed to process the collection of income tax via the PAYE system, along with national insurance contributions.

"The new system is improving the accuracy of the PAYE so that more people than ever before are correctly taxed," said the HMRC spokesman.

"We have until April to correct P2s that are genuinely wrong," it added.

However the CIOT said the system's database was failing to distinguish between current jobs and old ones, leading to tax codes being calculated on the assumption that someone has more than one job.

It said this was resulting in some people having their personal allowance split between two jobs, or allocated entirely to a job they no longer had, which would force their current employer to deduct too much 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," it said.

In a few cases the Revenue computer system has removed the personal allowance on the assumption that the person's income will be higher than £100,000.

Earners above this level will lose their personal allowance this coming tax year, in a measure first announced by the Chancellor in the 2008 pre-budget report.

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