Tax overpayments and underpayments

In May 2013, HM Revenue and Customs reported that an estimated 3.5 million taxpayers were due a tax refund for the year 2012/13, with the average repayment thought to be between £350 and £500.

At the same time, HMRC stated that around two million taxpayers had underpaid tax and would need to pay more. The 3.5m tax refunds anticipated by HMRC are for Pay as You Earn (PAYE) taxpayers. If you are due a repayment, you will be notified on a form P800 and receive a cheque from HMRC. The process is known as End of Year Reconciliation and takes place every year.

Although around 85% of tax deductions are correct, changes in an individual’s circumstances, such as moving jobs or ceasing work, can lead to errors which explain the requirement for the system of balancing payments.

Having more than one job can also result in the wrong tax code being applied. If your affairs are particularly complex, or you think your PAYE tax code is wrong, it’s worth checking this carefully. A key point to watch out for is the tax-free personal allowance you have been given. For most people this was £8,105 for 2012/13, resulting in a tax code of 810. If you receive state pension or taxable workplace benefits your allowance may be lower, however, so tax codes do vary.

If you are one of the two million people who have underpaid tax, you will also be notified of this on a P800 form. Unless you complete a self-assessment tax return, sums under £50 are not repayable.

If the amount you owe is under £3,000, it will normally be collected by adjusting your PAYE code for the next tax year, increasing the amount you pay each month. Where repayments over 12 months might cause financial difficulty, HMRC is prepared to consider spreading these over a longer period – to a maximum of three years. A common cause of tax underpayment is where someone has two jobs and is given full personal allowance by both employers.

Normally, your personal allowance applies to your main employment, with all pay from a second job being taxed if your allowance has already been used. In some cases the allowance can be split between employers however, so it’s easy to see how errors can occur.

Trying to have more accurate systems to calculate tax for 2013/14, HMRC has introduced a new system of ‘real time’ reporting for PAYE (Real Time Information- RTI) which should improve the accuracy of the system and make underpayment of tax far less common.

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