HM Revenue & Customs (HMRC) have confirmed that a considerable number of incorrect tax codes have recently been issued to employees and pensioners.
If your tax code is incorrect, then you will pay the wrong amount of tax each month. If it is too little, then you will end up with a tax demand at the end of the year. If it is too much, then your cash flow can be impacted upon.
Incorrect tax codes are nothing new, but it seems that the problem is particularly bad this year because of the recession and the increases in income tax from 6 April this year.
The reason why the recession is relevant is because Pay As You Earn (PAYE) does not cope well with multiple sources of income – so those that have two part time jobs or are working but also have a small pension, could be disadvantaged.
Also, low interest rates mean that coding adjustments for investment income will probably be wrong. The new tax changes are causing problems because the method of calculation is too complex for the PAYE system.
“The problem is most acute for those who are not within self-assessment and so do not file a tax return each year,” according to John Endacott, a Tax Partner at chartered accountants Winter Rule in Truro.
“I would advise pensioners in particular to look at how their tax codes on private pensions are calculated. We have seen cases where substantial amounts of tax have been overpaid over many years, in the thousands, because of incorrect coding adjustments and this is for individuals with average incomes. If in doubt, then take advice.”