Action called for on tax code problems

25 January 2010

More needs to be done to alert people to the risk that they may have been sent the wrong tax code.

The call came from the Chartered Institute of Taxation (CIOT) after worries emerged that a significant proportion of the 25 million tax coding notices that are being issued this year by HM Revenue and Customs (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."

If the error is not dealt with by HMRC in the next few weeks, the CIOT continued, misleading information will be sent to huge numbers of employers and pension companies. As a result, incorrect amounts of tax will be deducted from employees and pensioners.

The CIOT wants HMRC to act to warn people of the possible problem.

Specifically, HMRC should issue a clear public statement of the extent of the problem and explain what they are doing to tackle it.

This should involve a major publicity campaign, adverts in the national media and a clear, easy to find message on the HMRC website detailing how people can check whether their tax code is correct.

The CIOT also urged HMRC to check the issue of P2 letters yet to go out or to add a note to each one explaining how to check the code and, if it is incorrect, whether HMRC needs to be contacted at once.

Employers and pension companies, too, should be told what to do if they receive tax code information for former employees or receive more than one code for a current employee or pensioner.

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.

“The government should launch an urgent publicity campaign to highlight what has happened and tell people what they can do about it. They also need to add a specific warning about it to the majority of P2 notices – the letters containing tax code information – which have still to go out.”

Mr Hubbard added: “The new PAYE system is potentially very good and this is really just a teething problem – but a serious one that HMRC need to warn taxpayers and their advisers about and help them resolve.”

P2 notices, which contain tax code information, are being sent out in batches 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. The tax codes apply to the coming tax year of 2010/11.

HMRC responded by saying that there was no evidence of a large scale problem but advised taxpayers to check their codes.

A spokesman said: "There will be cases when some people receive an incorrect coding notice or more than one coding notice for the same employment in a short time, because there is a discrepancy with what we hold on our records. 

"Anyone in this position should check their code using the guidance included with the code and on our website, www.hmrc.gov.uk/incometax. If they cannot resolve their query they should call HMRC to make sure the right tax code is applied, ideally after the self-assessment deadline of the January 31.”

As for the increase in the number of codes being issued this year, HMRC pointed out that this is a feature of the new system.

The spokesman added: "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 new system is improving the accuracy of the PAYE so that more people than ever before are correctly taxed. We have until April to correct P2s that are genuinely wrong."