TAX CODES PUZZLE FOR EMPLOYEES (16/02/10)

Burgess Hodgson is warning that PAYE employees in Kent could face higher tax bills after an HM Revenue & Customs tax code blunder.

Despite recent news that the Government’s tax authority is taking measures to address the problem, thousands of faulty coding notices have already been issued – which means many employees could get a nasty shock when they open their April pay packet and find it up to £100 lighter.

Coding notices tell taxpayers how large their personal tax allowance will be in the coming tax year, and how much tax their employers should deduct.

But the onus is on the employee to recognise they’ve been given the wrong information – not always easy to do when you don’t know what you’re looking for. If they don’t spot it and tell HMRC, then their employer will receive the wrong information too and the employee is ultimately left short-changed.

Mike Horne, tax partner at Burgess Hodgson said the amount for basic rate tax payers could be a “couple of hundred pounds” but observes that for higher earners it could be “significantly more”.

“The problem of a wrong coding notice is that the employer has to operate it - even if it is obviously wrong,” says Mr Horne. “Some people will therefore end up paying far too much tax – resulting in potentially short-term cash problems until HMRC sorts it out - or too little or get a refund, with an unpleasant or unexpected bill at a later stage.”

After initially dragging its heels over the issue, HMRC has acknowledged that there is a problem. Its website says the problem is a temporary side effect of the creation of a database in a new computer system introduced to manage the collection of PAYE and national insurance.

"The transition to the new [computer] system has, however brought to light discrepancies in our existing records and this is resulting in a number of incorrect notices being issued," HMRC said.

"The vast majority of notices will be correct but there will be cases where, because the data carried over from our old systems does not match employers' data, some people receive an incorrect coding notice or more than one coding notice for the same employment because of these discrepancies."

In its latest information for those employers and agents dealing with incorrect code notices, it provides more reassurance that the department is making progress in identifying the issues giving rise to incorrect codes.

"We are undertaking a review of those cases which include one or more of the issues identified and will issue revised notices of coding to the individuals as soon as possible if they have already been sent a incorrect code,” says HMRC.

It is also prioritising certain cases, particularly “vulnerable individuals” whose codes may be incorrect. And it says it will be asking employers or pension providers to work with us more closely in the future to so that discrepancies do not creep in again.

But HMRC is also warning employers that they will receive more code notifications than normal this year, when the employer notifications start next month. Burgess Hodgson has also noted that codes have been issued for old employments or multiple codes issued for the same employment, so it’s worth checking what the code is actually for.

Mike Horne said the best advice was to check the tax code and contact HMRC if it needs to be changed. “Anyone under PAYE needs to make sure they understand what their tax code means,” said Mr Horne.

• If you’ve received some tax codes you’re uncertain about, please do send them to us. Although HMRC does usually send them to people’s agents, this is not always the case. If you want to discuss any of these issues, please contact us on 01227 454627.