HMRC overcharged workers £3.5bn in income tax last year

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HMRC overcharged workers £3.5bn in income tax last year, with 5.6 million Britons paying too much. Taxpayers should check that they are not overpaying through the PAYE system as HMRC is under no obligation to check and tell them if they have overpaid.

This overcharging through the PAYE system largely stems from HMRC issuing incorrect tax codes. If a taxpayers’ circumstances change and HMRC does not have the most up-to-date information, it will continue to deduct tax based on its own estimate of income without checking that with the taxpayer.

HMRC issues the incorrect tax codes due to:

• assuming that an employee is still receiving company benefits-in-kind such as company cars, healthcare and even gym memberships even though they may no longer be receiving that benefit
• incorrect assumptions about an employee’s additional income, such as rental income, dividends or freelance work that they are no longer doing
• confusion over how many jobs an individual is currently working
• out-of-date or late employer payroll information.

HMRC’s coding assumptions often go unchecked because paper tax code notices are no longer routinely issued.

This means millions of employees may be unaware that their tax code is wrong and that they are being overcharged.

Neela Chauhan, partner in our London office, says: “Millions of people are paying the wrong amount of tax simply because HMRC is almost guessing what they earn. For too many people, this will go completely unnoticed.” 

It is imperative that people check how much tax they are paying because HMRC now conducts fewer internal assessments to find errors and overpayments.

Neela says: “HMRC won’t always correct overcharging mistakes automatically. If you don’t check your tax code or your PAYE calculation, you may never get your money back. The onus is on taxpayers to spot HMRC’s errors.

“Individuals must check their tax codes and year-end PAYE summaries for mistakes. Particularly those with any form of non-PAYE income or company benefits.”

Even when overpayments are identified, reclaiming the money can be slow and frustrating. Many taxpayers face long waits, with written requests often ignored and phone calls going unanswered.