HMRC is not obligated to tell workers if they are overpaying them (Image: Getty)
Brits have been urged to check their paychecks for a wrong tax code, which has led to 5.6 million people overpaying HMRC. Workers have been overcharged £3.5 billion, or an average of £625 each, according to a Freedom of Information (FOI) request from accountancy group UHY Hacker Young.
Overpayments happen when HMRC issues an incorrect tax code on a worker’s payslip, usually as a result of changes to the worker’s employment. It can also happen when HMRC assumes that an employee is receiving company benefits-in-kind, such as company cars, even if they no longer are. Errors in assumptions about an employee’s additional income, such as rental income or freelance work, can also lead to this mistake. As a result, people paying tax as they earn could be accidentally giving more money to HMRC than they need to. Neela Chauhan, partner at UHY Hacker Young, said: “Millions of people are paying the wrong amount of tax simply because HMRC is almost guessing what they earn.”
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The full list of tax codes and their meanings are listed below (Image: Getty)
“For too many people, this will go completely unnoticed”, she explained. “HMRC won’t always correct overcharging mistakes automatically. If you don’t check your tax code or your PAYE [pay as you earn] calculation, you may never get your money back.”
The UHY Hacker Young partner added that the responsibility for spotting HMRC’s errors lies with the taxpayer. “Individuals must check their tax codes and year-end PAYE summaries for mistakes. Particularly those with any form of non-PAYE income or company benefits.”
What your tax code means
The amount you can earn each year before paying tax is £12,570, which means that the standard tax code for the majority of people with just one job is 1257L. GOV.UK explains that letters in your tax code refer to your situation, and how it affects the amount you can earn tax-free and the rates of tax you pay. The full list of tax codes and their meanings is listed below.
‘0T’ indicates that your Personal Allowance has been used up, or you have started a new job, and your employer does not have the details they need to give you a tax code. ‘BR’ indicates that all your income from this job or pension is taxed at the basic rate (usually used if you have more than one job or pension).
Code ‘C’ means your income or pension is taxed using the rates in Wales and ‘C0T’ shows that your Personal Allowance (Wales) has been used up, or you’ve started a new job, and your employer does not have the details they need to give you a tax code.
‘CBR’ indicates that all your income from this job or pension is taxed at the basic rate in Wales (usually used if you have more than one job or pension) while ‘CD0’ means that all your income from this job or pension is taxed at the higher rate in Wales (usually used if you have more than one job or pension).
Code ‘CD1’ shows taxpayers that the entirety of their income from this job or pension is taxed at the additional rate in Wales (usually used if you have more than one job or pension). ‘D0’ indicates that the full income from this job or pension is taxed at the higher rate (usually used if you have more than one job or pension).
A ‘D1’ code means all your income from this job or pension is taxed at the additional rate (usually used if you have more than one job or pension) and code ‘K’ shows you have income that you are not paying tax on which is more than your Personal Allowance.
If you find a code ‘L’, this means you are entitled to the standard tax-free Personal Allowance and code ‘M’ indicates you can receive Marriage Allowance, a transfer of 10% of your partner’s Personal Allowance.
Code ‘M1’ indicates a taxpayer is on an emergency tax code and ‘N’ illustrates that you have transferred 10% of your Personal Allowance to your partner through Marriage Allowance. ‘NONCUM’ means you are on an emergency tax code and ‘NT’ shows you are not paying any tax on this income.
A code ‘S’ tells taxpayers their income or pension is taxed using the rates in Scotland and ‘S0T’ shows their Personal Allowance (Scotland) has been used up, or they have started a new job and their employer does not have the details they need to give them a tax code.
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‘SBR’ indicates that all your income from this job or pension is taxed at the basic rate in Scotland (usually used if you have more than one job or pension), while ‘SD0’ shows all your income from this job or pension is taxed at the intermediate rate in Scotland (usually used if you have more than one job or pension).
If you find an ‘SD1’ code, all your income from this job or pension is taxed at the higher rate in Scotland (usually used if you have more than one job or pension) while an ‘SD2’ code shows all your income from this job or pension is taxed at the advanced rate in Scotland (usually used if you have more than one job or pension). Code ‘SD3’ means that your income from this job or pension is taxed at the top rate in Scotland (usually used if you have more than one job or pension).
A code ‘T’ means your tax code includes other calculations to work out your Personal Allowance. Codes ‘W1’ and ‘X’ both indicate that you are on an emergency tax code.
How to check your tax code
Taxpayers can check their tax code on their payslips or by logging in to their personal tax account online or via the HMRC app.
Workers will need their Government Gateway ID and password or their National Insurance number along with two of the following: a valid UK passport, a UK photocard driving licence issued by the DVLA (or DVA in Northern Ireland), a payslip from the last three months or a P60 from your employer for the last tax year, details of a tax credit claim if you have made one, details from a self assessment tax return (in the last two years) if you made one or information held on your credit record if you have one (such as loans, credit cards or mortgages).
HMRC’s advice on checking your tax code is available here.
HMRC said everyone is responsible for ensuring their own tax code is correct. It added that the majority of repayments are paid promptly, and that it is investing £500 million in digital services to help customers pay the right tax first time.
