Tax debacle could cost you £100 each month

More than 45,000 people will this week receive letters from HM Revenue & Customs (HMRC) to give them warning that their employers have not deducted the correct amount of tax from their pay packets and that they have underpaid or overpaid as a result.

The letters are the first to be generated automatically by an HMRC computer system introduced last year to identify taxpayers not paying the correct amount of tax in the Pay-As-You-Earn (PAYE) system through which employers deduct tax and national insurance from wages

The errors typically occur because employees' income or benefits change after their tax codes have been issued, but can result in substantial refunds or demands for extra payments.

Of those receiving letters in the coming days, around two-thirds will be told they have paid too much tax and that they are now due refunds totalling £1.8bn. However, the 15,000 workers receiving letters demanding that they make additional payments to HMRC have, on average, seen larger mistakes accrue on their accounts and collectively owe a total of £2bn. HMRC will start recouping the £2bn from next April. It means many people could be at least £100 a month worse off.

The computer system in question, the National Insurance and PAYE Service (NPS), was launched in June last year and has suffered a series of teething problems, with HMRC's own data often failing to match the information supplied by employers.

A report published by the Auditor General last month revealed that delays in introducing the NPS, which came online two years later than expected, had exacerbated existing difficulties at HMRC, with more than 18 million unresolved "open" cases now outstanding. The report gave warning that HMRC might have failed to collect as much as £1.6bn owed.

A spokesman for HMRC said it was working hard to ensure that fewer people had to have their tax affairs corrected in this fashion in future.

"Ensuring that the right tax is deducted at source from salaries and pensions is a normal part of the PAYE cycle," he said. "The vast majority of the 40 million people who pay through PAYE deductions are correctly taxed but because circumstances change during the year there will always be a minority who have paid either too much or too little.

"This year and going forward, the new IT system will mean more people paying exactly the right tax at the time than ever before," he added.

Tax experts said that anyone affected should scrutinise the HMRC's calculations. Paul Aplin, who chairs the tax technical committee at the Institute of Chartered Accountants in England and Wales, urged taxpayers to read their letters "very carefully".

"Have a look to see how they have calculated the tax," he advised. "Have they put any benefits in there like a company car or medical benefits that you didn't actually have?"

Mr Aplin also suggested that taxpayers could still avoid paying any additional money if they could demonstrate they provided all the information necessary to calculate their tax correctly and the Revenue failed to use that information for 12 months. "You could use a concession to get them to write off some or all of the tax," he said.