Hope for 900,000 as ministers opt not to chase £160m in lost taxes

Almost one million people have been granted a tax break of up to £300 as a result of the PAYE debacle, tax officials disclosed yesterday.

The decision not to chase 900,000 taxpayers for underpayments for the past two tax years will cost the public purse £160m, Her Majesty's Customs and Revenue (HMRC) admitted. It also said it would not charge interest on debts over £300, as it had intended.

Appearing before MPs on the Treasury select committee, the HMRC's head, Dave Hartnett, and its chief executive, Dame Lesley Strathie, admitted they did not know the cost of the gesture, which they said resulted from a ministerial diktat. The pair have been under pressure since HMRC announced two weeks ago that a new computer system capable of reconciling disparate pieces of PAYE information had identified 5.8 million people who had paid too little or too much tax between 2008 and 2010.

Between now and December, 4.3 million people will receive an average refund of £420 – a total of £1.8bn – while 1.45 million under-payers will be asked for an average of £1,380, a total of £2bn.

Before the announcement, HMRC had already decided not to chase anyone owing less than £300 (its usual discretionary limit for non-payment is £50), but had not divulged the number of people affected.

The Independent disclosed last week that in addition to the 5.8 million people who underpaid or overpaid after March 2008, the HMRC has a further 17.9 million unfinished or "open" PAYE cases from earlier years. Hundreds of extra workers are sifting through these older cases and HMRC admitted yesterday that it had no idea how much money was due or owed from them.

Mr Hartnett said he was sorry for his "insensitivity" on BBC Radio 4's Moneybox, when he refused to apologise for the debacle. He said: "I know how to apologise, I've had to do it before. I did not do it then and I am sorry for that."

Dame Lesley said: "It is very unfortunate that we have failed in this story to make the point that 4.5 million people are going to receive a cheque before Christmas."