Individuals with earnings from employment and/or any occupational and private pensions normally have their income tax deducted as they are paid under the pay as you earn (PAYE) system. Individuals are issued PAYE coding notices by HMRC, with HMRC also providing employers and pension providers with the individual’s specific code, which is applied when they pay the individual. This system should collect the right amount of tax from most people each year, however, this is not always the case, due to incorrect PAYE notices being issued by HMRC.
It is important to note that any shortfall of tax arising due to an incorrect tax code is the individual’s responsibility, not the employers or pension providers, as it is often assumed. Individuals should therefore consider these steps to avoid any financial shocks as households look to meet soaring energy costs and food bills amidst the cost-of-living crisis.
At the beginning of each tax year, HMRC issues a P2 PAYE tax code notice informing taxpayers of their tax code. The notice of coding explains how the tax code has been made up by HMRC and should include all relevant items that could impact the tax code, including any expenses and benefits relating to an individual’s employment.
Underpayments of tax from a previous tax year may also be reflected in the tax code. Such underpayments may have been estimated based on the records available to HMRC, so they may be incorrect. As the notice of coding is generally issued automatically, errors can occur, leading to the creation of incorrect tax codes.
Errors may be due to a number of reasons, including:
- the annual tax-free personal allowance is incorrectly applied against more than one income source;
- a taxable social security benefit or state pension is not taken into account in the tax code;
- the individual receives allowances which were not due to them, or does not receives some that are due;
- the individual has untaxed income, or incorrect work expenses included in their PAYE code; and
- the incorrect processing of P45 and P46 forms when changing employment.
Some people are more at risk of receiving incorrect tax bills if:
- they are new to employment, have multiple employments, or have changed jobs during the tax year (students often fall into these categories);
- they have been issued with a no tax (NT) code in error; and
- they are employed but also receive a taxable state benefit, state pension or occupational pension.
In many cases, the individuals affected may be on the lower end of the income scale. This can usually be explained by the fact that these taxpayers consider their affairs to be too simple to worry about as all their income tax deductions are done via the PAYE system.
However, as people pay more attention to their financial circumstances due to rising costs, taxpayers should ensure they are checking their PAYE notifications in a timely manner and, where unsure on whether or not information listed in the P2 ‘PAYE tax code notice’ is correct, seek clarification from HMRC or a professional adviser. Individuals can request tax code corrections by calling HMRC’s self-assessment service, and can receive further support from TaxAid, a charity that helps people with their tax affairs and tax coding issues.