A technical glitch has meant that you might accidentally end up paying over £1,000 more in tax next year. Find out how you can make sure you don't pay the tax man a penny more than you need to.
What's the problem?
It's possible that thousands of people have been issued with the wrong PAYE tax code thanks to a glitch in HMRC's (HM Revenue & Customs) new computer system.
Why does it matter?
Your tax code is used by your employer or pension provider to work out how much tax you should pay on your earnings each month for the next year. If it's wrong you could end up paying out far more to the tax man than you really need to.
The Chartered Institute of Taxation have estimated that those affected could end up being taxed almost £1,300 extra over the course of the next tax year- more for those in the higher tax band - if they don't get the error rectified before the new tax codes take effect in April.
How can I tell if I'm affected?
The first thing to do is to check your 'PAYE Coding' letter as soon as you receive it.
Key points to look for are as follows:
You receive numerous tax codes but only have one job
They could be sent on the same, or different letters but as you should only have 1 tax code per job; receiving more than this should set alarm bells ringing.
Your Coding letter states the name of a previous employer
One of the most common errors that seems to have arisen is that HMRC's system has failed to discriminate between an individual's current and previous employment. As such, it's allocated tax codes - and calculated tax bills - based on the assumption that people are receiving wages from their old, as well as their current job.
In instances where this error is occurring, HMRC's system has been allocating the whole of an individual's personal allowance (£6,475 for those under 65) to their old job and subsequently their old earnings.
This means that come April when the changes come into force those that have been affected won't be registered to receive any of their current salary tax-free (as according to the tax man they're redeeming their personal allowance against their other earnings), so they'll be taxed on every penny they earn.
For the basic rate tax payer this could mean that take home pay is suddenly cut by over £100 a month. So, if your notice the name of your previous employer on your PAYE Coding letter you should take this as a sign that you need to take action.
Your personal allowance is split but you only have one job
If you only have 1 job the whole of your personal allowance (£6,475 for those under 65) should be assigned to this job on your PAYE coding letter. If the letter suggests any different or states that your personal allowance has been split in any way, you know that you have a problem.
Of course, if you have more than 1 job then you should expect your personal allowance to be split, but make sure the total adds up.
Your tax code is different from last year
It's by no means a given, but if your circumstances haven't changed since this time last year it's likely that your tax code will match the one you were sent then. Digging out last year's PAYE Coding letter and comparing the tax code to the one you have been allocated this year is another way of spotting any problems.
Bear in mind though that just because this year's tax code is different from last year's it doesn't necessarily mean that there's been a mix up. Your tax code can change for a whole host of reasons, for example if you change jobs, get a pay rise or the like, so this isn't a 100% accurate way of checking either way. It will however give you some idea as to whether there might be a problem.
You can find more information on decoding your tax code on HMRC's website.
What do I need to do if I spot a problem?
It's really important that you get any issue sorted as soon as possible. HMRC will send out notification of your tax code to your employer or pension provider in March and this will set the wheels in motion for a higher tax bill from April onwards if there has been a problem.
If you notice an error you should contact your local Tax Office and ask them to investigate. You can find their details on your PAYE Coding letter or via HMRC's website.
However, you should wait until next week to get in touch though as they're going to be snowed under with queries relating to the self assessment tax deadline until 31st January and are unlikely to deal with any tax code queries until this has passed.
