There is press coverage about taxpayers being hit with tax bills of £1,500. Why this happened and will you be affected?

Employees (rather than the self-employed) pay their tax through the PAYE system where employers deduct tax from their monthly or weekly pay, based on a ‘PAYE Code’ provided by HM Revenue & Customs (HMRC). The same system applies for pensioners receiving private or company pensions.

For all but the very simplest of cases the system relies on making estimates of benefits, pension contributions, other income when setting the PAYE Code. The position should then be checked and amended to reflect the actual figures after the end of the tax year (5 April). Because of an upgrade to the HMRC computer system last autumn, the figures are only now being checked for some 2007/8 cases and for most 2008/9 cases. Also the new computer is identifying errors not highlighted by the old system.

The people most likely to be affected are those with multiple jobs/pensions or with benefits in kind (e.g. company car/van or medical insurance), who have changed jobs or have had gaps in employment, pensioners with incomes between £20,000 and £30,000. Taxpayers who submit a Tax Return each year should not be directly affected by these as submitting the Return should ensure any errors get identified each year anyway.

If you receive a refund, be pleased but do check why it has arisen – HMRC do make mistakes (as we see here) and you do not want to be asked to refund this later.

If you receive a notice that you owe tax, it is likely to be collected through your salary from April 2011 to March 2012. If more than £2,000 is due you may be asked to pay immediately. First you should check the figures or get someone to do this for you. The notes sent with the calculation will help you do this, but you could ask an accountant to help, your employer may be willing to do so and for low earners and pensioners there are Advice services who can help (Tax Help for Older People; Tax Aid; Citizen’s Advice). If the tax relates to 2008/9 or earlier, you believe that HMRC had all the information they needed to get things right and it was ‘reasonable’ for you to believe your tax affairs were in order you can ask them not to collect the tax. Also if asked to pay now (because more than £2,000 is due) you can ask for a ‘payment arrangement’ where you pay off over a number of months. If you do nothing you will either see the change to your pay in April next year or get demands to pay the tax.