Employees face higher tax bills after HMRC code blunder

As if the mad dash to the 31 January self-assessment filing deadline isn’t
enough to keep advisers and their clients on their toes, it appears that
employees’ tax affairs are set to get a lot more complicated.

The taxman has issued a whopping 25 million PAYE tax codes for 2010/2011,
double that of the previous year and of which a significant proportion are
wrong, according to a claim by the Chartered Institute of Taxation.

The rise in codes has come as HMRC moves onto a new computer system.

Andrew Hubbard, president of the CIoT, warned advisers and their business
clients to check their new codes. “Most people on PAYE are used to assuming that
what the taxman sends them is correct, [filing] away coding notices without
bothering to check them.

“This year, many of them are being given wrong information, and unless they
spot it and tell HMRC, their employer will receive the wrong information too and
the employee could get a nasty shock when they open their April pay packet and
see it is as much as £100 lighter than they expected.

Richard Mannion, director of national tax at Smith & Williamson, said
that HMRC’s previous system had suffered problems in the past. “They’ve now
installed a new system, which is more flexible, but there have been teething

He said that the mistake was likely to significantly affect pensioners with
part-time jobs or people who hold down more than one job, as the system was
likely to generate a different tax code notice per job.

People with investment income, says Matt Coward, director of private client
services at PKF, could also be affected by incorrect codes. “[HMRC might] try to
collect tax due on an individuals’ estimated investment income – bank interest,
dividends, rental income – through their tax code.

In many cases, that estimate of investment income will be based on previous
tax returns, and may well be excessive and out of date,” he said.
So what would be the potential scale of loss to an individual from a wrong tax

Mannion said it could be a “couple of hundred pounds lost” but observes that
for higher earners it could be “significantly more”.

Both said that the best advice was to check the tax code and contact HMRC if
it needs to be changed. “Anyone under PAYE needs to make sure they understand
what their tax code means,” said Mannion. “Take a little bit of responsibility:
make sure you have the right tax code.”

A HMRC spokesperson insisted that “the new system is working as it should”
and added: “As part of our transition to this new system, in this first year, we
also expect some of the codes we issue to be incorrect. Anyone in this position
should call HMRC to make sure the right tax code is applied.”

In our view

So advisers looking after private clients with employment should see the
obvious here: make sure they’ve got the right code. Perhaps accountants should
also step up to the plate and help a business client make sure its staff are
paying the right tax. FDs, do you feel a responsibility to help your staff out?
Of course, it would help if HMRC got things right in the first place.

Further reading:

HMRC tax codes

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