PAYE problems to last six months

Company payroll departments and payroll services suppliers will be dealing with tax queries from employees for up to the next six months after it emerged that millions of people have paid the wrong tax, experts have warned.

As HM Revenue & Customs begins to write to around six million people who have paid either too little or too much tax and national insurance under the Pay As You Earn (PAYE) system, small businesses with limited payroll staff will face the most disruption.

"Some people will have queries for their payroll department," said Bill Dodwell, head of tax policy at Deloitte. "If you have several million people wanting extra copies of their P60s it's could create pressure for [for payroll departments]. It'll probably take three to six months for accountants and payroll departments to deal with these queries."

David Whiscombe, partner at BKL Tax, a tax consultancy, and member of the tax panel at the UK200Group of accountants and lawyers, said the payment errors for the tax years 2008-09 and 2009-10, underscored the need to reform PAYE.

“While it’s always popular to knock HMRC for getting it wrong, this isn’t what’s happened in this case," he said. "The simple fact is that the PAYE scheme was never designed to cope with the complexity of today’s tax system. It’s been failing to do so for years and the systematic errors reported over the weekend aren’t new, it’s just that the introduction of a more sophisticated computer system has brought them to light for the first time."

He added that the Office of Tax Simplification, which was set up by the government in July, provides an opportunity to streamline the tax system.

The government is consulting on plans to give each employee be given a single computerised tax account which brings together their employment and NI records, giving HMRC real time information of all payments made.

Currently, both employers and pension providers make tax and national insurance payments for employees to HMRC and report them to the tax office once a year. Annually reporting those figures can result in under-payments and over-payments of tax.