HMRC recalculates bills for 5 million taxpayers

Some 5.5 million people overpaid or underpaid tax last year, HM Revenue & Customs has admitted. It means they will be clawing back up to £1bn from unsuspecting taxpayers for unpaid tax in the 2012-13 financial year.

But up to 3.5 million will receive an average repayment of between £350 and £500. That means HMRC will be handing back up to £1.75bn.

About 2 million taxpayers will receive surprise demands after the Revenue calculated they underpaid tax in the 2012-13 financial year. They will be asked to make up an average shortfall of between £400 and £500, although the Revenue said it allow the shortfalls to be paid during the 2014-15 tax year.

HMRC began the laborious process of contacting the millions affected on Wednesday after it started its annual PAYE End of Year Reconciliation process for 2012-13. With so many people to contact, some taxpayers won't find out whether they owe money – or are due a refund – until October.

An HMRC spokesperson explained: "Around 85 per cent of pay as you earn taxpayers pay the right tax throughout the year. But if a customer's circumstances have changed over the course of the year – if, for example, they have moved in and out of work, or received new benefits – we need to work out whether they have paid too much or too little tax. This is the normal process that the PAYE system has used for 70 years."