A quarter of all taxpayers may be paying the wrong amount of tax due to PAYE errors

  • Pensioners particularly at risk
  • Taxpayers with property or investment income may be paying too much tax

A quarter of all taxpayers may be paying the wrong amount of tax due to incorrect PAYE codes according to our analysis.

Our research looked at hundreds of the latest batch of PAYE codes sent to its clients to determine the exact number requiring some form of adjustment. Around 25% of codes reviewed from a random, non-risk graded sample would have resulted in the taxpayer paying too much, or in some cases too little, tax.

In many cases the amount of tax in error was thousands of pounds – for many of the taxpayers concerned a very significant amount of money.

Taxpayers with multiple sources of income – such as pensioners and higher rate taxpayers – are particularly vulnerable to PAYE coding errors. In some cases HMRC automatically tried to collect tax on property or interest income through PAYE when the actual amount owed by taxpayers was zero.

John Sheehan, partner at our Letchworth office, comments: “HMRC is trying to collect tax early to improve its cashflow without asking taxpayers first. This usually isn’t in the interest of taxpayers. Many taxpayers would be significantly better off paying tax on their investments via their self-assessment returns.”

“To make matters worse, HMRC’s estimates of how much tax is actually due from investment income are often highly inaccurate. Unlike self-assessment, if taxpayers overpay through PAYE, they don’t receive any interest from HMRC when the adjustment is made.”

He adds: “The big concern is that many taxpayers simply won’t think to check and will end up paying tax twice.”

Where taxpayers are earning close to the higher rate tax band, HMRC often assumes that they will be a higher rate taxpayer the following year – even if they have never been a higher rate taxpayer before.

John says: “HMRC usually has all the information it needs on its systems, so has little excuse for making assumptions and getting it wrong.”

According to our findings, pensioners appear to be particularly vulnerable to having their personal tax free allowances incorrectly restricted. In two-thirds of cases where the tax code was wrong, the pensioners ended up paying too much tax.

John says: “Pensioners often have multiple sources of income, so seem to be particularly vulnerable to PAYE errors. Most, however, are on modest incomes and may not notice for quite a long time, if at all, that they are owed money.”

“Even if they have underpaid, this can cause serious financial problems in later years when HMRC collects what can be a hefty tax bill.”