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900,000 have tax repayment demands written off

Nearly one million people who did not pay enough income tax have had their repayment demands written off, it emerged today.

An estimated 900,000 workers will not receive a letter from HM Revenue & Customs (HMRC) demanding extra money after the Government raised the threshold under which it writes off any tax that is owed from £50 to £300.

It is thought that 2.3 million people have underpaid income tax during the past two tax years due to errors in their Pay As You Earn (PAYE) tax code, but only 1.4 million of these will be chased for the money.

Those who will have to make up the shortfall collectively owe around £2 billion, or an average of £1,428 each.

But Exchequer Secretary David Gauke promised yesterday that the Government would make collecting the money people owed "as painless as possible".

People who owe less than £2,000 will be able to pay the money in monthly instalments taken from their salary during the 2011/2012 tax year.

Those who can show they are unable to afford to repay all of the money in one year will also be given the option of paying it back over three years.

Mr Gauke said: "In total, the Exchequer is owed approximately £2 billion. Being left with the worst deficit in peacetime history means we simply cannot afford to write off all of these underpayments.

"To ensure that the tax system is fair for everyone, where everyone pays their fair share, we are taking action to recoup these funds as painlessly as possible."

But those who owe more than £2,000 could be charged interest of 3% - six times higher than the Bank of England base rate - on the money they owe if they do not repay it within deadlines set by HMRC.

However, the 4.3 million people who are due a rebate, averaging £418 each, will be paid interest on the money they are owed by the Revenue of just 0.5%.

HMRC defended the interest rates it paid and charged, saying it had to charge interest on unpaid tax to encourage people to pay the money they owed on time.

A spokesman said: "The rate of interest on overpaid tax reflects the average commercial rate for a return on deposits. No commercial body has the same rates for both paying and charging interest.

"The rate of interest charged on unpaid tax is designed to encourage payment at the right time and to recompense the Exchequer for the loss on taxes paid late.

"If the interest rate on overdue tax was too low, it might encourage people to treat HMRC as a source of cheap credit. If the interest rate on overpaid tax was too high, it might encourage 'banking' with Revenue & Customs."

HMRC has begun sending out letters to the nearly six million people who are affected by the errors.

It plans to inform all those who have over or underpaid tax of the situation between now and Christmas.

Tax experts have said people who have underpaid tax may be able to get out of paying the extra money by asking for an Extra Statutory Concession, also known as an ESC A19.

People can do this if they can show they provided HMRC with all the information it needed to get their tax code right, but it did not use these details within 12 months of the end of the tax year in which they were received to claw back the extra money.

However, ministers have warned that the concession is only likely to apply in a minority of cases, and have urged people not to get their hopes up.

Every year, HMRC checks that the amount of tax and National Insurance deducted by the employer matches the information held on its records.

The wrong amount of tax may have been paid if people failed to tell HMRC about a change to their circumstances, such as starting a new job, having more than one job, or receiving a new benefit through work, such as a company car.

In some cases the wrong tax code will have been used because HMRC failed to act on information it was given, but in other cases it will be the fault of companies for not passing on changes to employees' circumstances to the Revenue, or the fault of the individuals themselves.

A high number of errors have been thrown up this year due to the use of a new IT system, which holds all the information on an employee in one place, rather than having it spread over several different systems, making it easier to spot discrepancies.

However, the new system should mean that going forward more people pay the right amount of tax through the PAYE system than previously.