Tax woes for 5 million as HMRC admits fresh errors

Almost 5 million people will face fresh tax confusion in the next few months, Her Majesty's Revenue and Customs (HMRC) has admitted. In the next two weeks it will start sending revised calculations of tax due for 2010-11. Some will receive cheques after Revenue calculations revealed that they overpaid tax, while others will be hit by demands for underpaid tax.

Up to 3.5 million people could be in line for a refund, HMRC has admitted, with rebates worth up to £320. But there will be bad news for around 1.2 million taxpayers who will be sent demands in the autumn for more money, of between £500 and £600.

The rebates – and additional tax demands – have occurred because of continued errors in the way HMRC calculates the tax codes used in the pay-as-you-earn (PAYE) tax system. Over the previous two tax years, 5.7 million taxpayers were affected by HMRC miscalculations, forcing the Revenue to refund an average of £420 to 4.3 million people. Meanwhile, 1.45 million were asked for an average £1,380 more to balance their tax bills.

For the 2010-11 tax year, the number of people affected by HMRC miscalculations has fallen to up to 4.7 million, though the figure could be as low as 2.9 million. As yet, the Revenue is prepared to say only that the number of people due refunds is between 1.7 million and 3.5 million.

HMRC said it will begin sending out letters and cheques in early July to those who it has now discovered were overcharged tax during the 2010-11 financial year. The 1.2 million people who HMRC says did not pay enough tax in 2010-11 will be sent demands in the autumn – probably in September and October – for the underpaid amounts.

The Revenue will be contacting all the taxpayers affected so there is no point in individuals getting in touch with tax offices to find out if they are getting anything or owe more tax. The way the tax code is calculated is so complicated that it is almost impossible for individuals to know whether they have paid enough tax, or indeed, too much.

As with last year's refunds and extra tax demands, the first time most people will know about the miscalculation on their tax account is likely to be when they get a welcome cheque from HMRC, or face the horror of an additional demand.