A third of tax codes issued by HMRC need to be amended, according to top twenty accountancy firm, Kingston Smith LLP. Although the situation will get corrected the following tax year, it can have a serious impact on cashflow for those who are overpaying. Similarly, those who are underpaying will be faced with a significant, and often unexpected, tax liability the following January, when the situation will be rectified.
According to Mark Bridge, partner at Kingston Smith LLP in St Albans, “It’s important to get your tax code right. Tax codes are based on information derived from the last submitted tax return. However, as we all know, people’s situations do change from year to year. Everyone needs to take responsibility for checking their own tax codes to ensure they reflect their current circumstances. I have come across a number of people who had over paid tax by over £1,500 because they hadn’t alerted HMRC to relevant changes to their personal circumstances.
“The current economic situation has meant that many people need to tighten their belts and be cautious about spending. Overpaying tax, when times are hard, can have serious financial implications.”
The two most common reasons seen by Kingston Smith for an incorrect coding are:
1) Where benefits have changed significantly – e.g. the introduction, withdrawal or significant change to a company car;
2) Where HMRC claims to be collecting an earlier year’s underpayment despite Kingston Smith’s request that it is paid by direct collection on the normal due date.
According to Mark Bridge, many people aren't aware that HMRC also attempts to collect the tax on investment income through the PAYE system instead of it being paid on the normal due date. Such tax would normally be due on the 31st January following the tax year. Where it is put in the coding, collection of the liability is being very significantly accelerated and unrepresented taxpayers may not spot this. This can cost up to £4,000 per person per year, the equivalent of £333 per month.
Kingston Smith’s advice for checking a tax code is to read through the items shown on it, which clearly indicate what allowances are being given, followed by items that are being deducted. The firm advises people to check that deductions for benefits are realistic, particularly looking out for any deduction relating to savings income.
Mark Bridge concludes, “It is impossible to quantify how much anyone may be losing, or gaining, as a result of the wrong code. It varies widely from case to case. For taxpayers who are required to file Self Assessment tax returns, any errors in the code will ultimately come out in the wash. However, timing is critical. This year, more than ever before, people who don’t check their tax codes may suffer serious cashflow problems by paying out unnecessary tax.”