3.5m people set to receive tax refunds

Up to 3.5 million people are set to receive a tax refund from next week, but as many as 1.6 million face a bill for underpaid tax, HM Revenue and Customs (HMRC) said today.

Those who are due a rebate will get an average windfall of £379, while the typical shortfall for those who have not paid enough is £537, under Pay As You Earn (PAYE) adjustments for the tax year 2011/12.

The tax bills and refunds, which are a normal part of the PAYE process, are being handed out two months earlier than last year, meaning people will get their money back more quickly as well as knowing exactly what they owe, HMRC said.

Under PAYE, a tax code is allocated to taxpayers to ensure that the right amount of tax is deducted at source, but people can end up paying too much or too little when their circumstances change and HMRC is not told.

Around 85% of people generally pay the correct amount of tax during the year, but end-of-year adjustments are made for the 15% who do not, because they may have moved jobs or had gaps between periods of work, for example.

HMRC said it expects between 2.1 million and 3.5 million people overpaid tax in 2011/12, while between 1.2 million to 1.6 million taxpayers paid too little.

Stephen Banyard, acting director general for personal tax, said: "We are pleased that we are able to start this process more quickly than in previous years, giving money back to those we owe and delivering certainty to those with something to pay.

"We are improving the PAYE system further through the introduction of Real Time Information (RTI), which will make it easier for employers and pension providers to administer as they will tell HMRC about PAYE payments at the time they are made - as opposed to only at the end of the year - reducing the need for corrective actions at a later stage."

The TaxPayers' Alliance has previously called for a simpler tax system, describing the current one as an "administrative nightmare" which has seen HMRC have to clear a backlog of PAYE cases for the tax years 2003 to 2008.

A new IT system was introduced in 2010 which made it easier to spot discrepancies, and this meant more cases where people had overpaid or underpaid came to light.

HMRC has said that underpayments and overpayments in tax at the end of the year are "part of the PAYE system".

In most cases the shortfall for those who have underpaid tax will be automatically collected in instalments over the following tax year through the PAYE system.

But the Revenue body said it can spread repayments over a longer period in cases where it would otherwise cause hardship.

For those who have overpaid, repayments are made automatically and there is no need to make a claim.

PA