You should always check your taxes. Unfortunately, far too many people are unable to understand their PAYE situation, especially when they have multiple sources of income.
Last year, LITRG helped countless taxpayers to decipher their ‘P800’ tax calculations and to cope with those unexpected bills. We hope to do the same for calculations issued for the tax year which ended on 5 April 2011 (‘2010/11’).
This guide is divided into the following headings for ease of reference, although we do urge you to read it in full.
- 2010/11 ‘Reconciliations’ – what are they?
- How to check the calculation
- Why did I not pay enough tax?
- Contacting HMRC
- Other sources of help
- How will the underpayment be collected? (Includes specific information about state pensioners)
- What if I cannot afford to repay?
- What if I am on means-tested benefits?
- Links to further guides and example letters
HMRC are now reviewing individuals’ PAYE records for the tax year to 5 April 2011. From the data on their computer, they will work out whether they think you have:
- paid the right tax (in which case, you won’t hear from them)
- paid too much (and are due a refund)
- not paid enough (and so, if they think you owe £50 or more, they will send you a bill).
HMRC began with sending out refunds. From early November until the end of the year, they will be sending out the bills or ‘underpayments’ as they call them.
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Once you have recovered from the initial feelings from opening the envelope and realising that HMRC think you owe tax, the first thing to do is check the calculation.
Importantly, much as it might look like one, the tax calculation is not a demand for payment and it is not an assessment which can be appealed – it is HMRC’s estimate of your tax position.
HMRC will send notes with the calculation to help you check it. Ask yourself:
- Where did these figures come from?
Compare them to other documents showing details of your various sources of income, such as your P60s, P45s, P11Ds, and bank and building society statements.
- Have several jobs or pensions been added together?
More than one source could be shown as a single amount of ‘PAYE income’, so find your calculator!
- What could be missing?
Does the calculation show all the deductions and reliefs to which you are entitled? For example, have you told HMRC about your pension contributions or Gift Aid donations?
- Can I claim any expenses against my wages?
Some common ones are: using your own vehicle for business travel (mileage allowances), if not fully reimbursed by your employer; and special clothing allowances for certain trades.
- Have I got all my tax allowances?
Some allowances are commonly missed, such as Blind Person’s Allowance for yourself, or transferred from your spouse or civil partner if they cannot use it themselves. Note that you do not have to be completely blind to claim Blind Person’s Allowance.
Higher personal ‘age’ allowances could also be due if you celebrated your 65th or 75th birthday in the tax year. Or if you got married or registered a civil partnership, and either you or your spouse or civil partner was born before 6 April 1935, you will have become entitled to claim Married Couple’s Allowance.
- Am I getting something from the past to which I’m no longer entitled?
Your calculation could also be incorrect if HMRC are still giving you an allowance or expense against your income which you can’t claim any more. For example, if you have changed jobs or stopped work and used to claim certain expenses which no longer apply.
- What rate of tax am I paying?
Most people on low- to average earnings pay tax at the basic rate of 20% (our tax rates guide gives more information of the different tax ‘bands’ depending on your level of income). But if you have a small amount of non-savings income to set against your personal allowances, and some bank or building society interest on top, you may be entitled to pay tax at a reduced rate of 10% on that bank or building society interest.
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After checking that the figures on the calculation are correct, you should try your best to understand why you did not pay enough tax. This is important in working out whether you can argue that you should not have to pay the bill.
Again, ask yourself some questions:
- Did my employer or pension provider make a mistake?
It is possible that the underpayment has arisen due to your employer or pension payer not operating PAYE correctly. They may have dealt incorrectly with forms such as the P45 or P46 you gave them when you started in employment or first received the pension, or with the codes they received from the tax office. If this is the case then HMRC should first seek the tax from the employer or pension payer, not from you.
Read our Employer or pension payer error guide (a link to which can be found at the bottom of this article).
- Did HMRC make a mistake or fail to use information to get my tax right?
The underpayment could have arisen because HMRC have failed to make timely use of information about you which they have had in their possession. In such cases, you can consider asking HMRC to write off (that is, not to charge you) the tax under their Extra-Statutory Concession A19 (ESC A19).
But note that A19 usually only applies to underpayments for tax years ending more than 12 months ago - for example, you cannot normally use ESC A19 to ask for tax owing for 2010/11 to be written off if HMRC are advising you of the underpayment in, say, November 2011.
However, if HMRC have persistently got something wrong year after year, they do have the power to write the tax off for all years up to and including 2010/11. So if you underpaid tax in earlier tax years, and an underpayment in 2010/11 occurred for the same reasons, A19 might apply dependent upon your individual circumstances.
Read our Extra-Statutory Concession A19 guide (a link to which can be found at the bottom of this article).
- Was I misinformed by HMRC?
HMRC set themselves high standards and if they fail in maintaining those standards they may write off tax (but be aware that this is only likely to be in few cases).
If you are not entirely happy that HMRC have done everything correctly then you should read our Misleading HMRC information and complaints guide (a link to which can be found at the bottom of this article).
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Discovered a problem with the calculation? Or don’t understand it? Contact HMRC’s Helpline on 0845 3000 627 (textphone for those with hearing or speech impairment, 0845 302 1408). Be ready with the calculation as HMRC will ask for your National Insurance Number (NINO) and security questions before discussing it with you.
Keep a note of the call, including the date and time, the name of the person that you spoke to and what was said on both sides. HMRC might ask you to write in to claim reliefs and allowances, or you might prefer to write with a query, particularly if you are calling an expensive 0845 number from a mobile.
In the letter, give your NINO, PAYE reference, full name and address, and explain your question or claim. Sign and date the letter in ink, keep a copy of it and any enclosures and get proof of postage.
At the end of this article, we provide links to further guides. These include example letters to help you contact HMRC about your calculation for various reasons – from querying whether your employer has made an error, to requesting adjustments to the calculation or an explanation of it.
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Our guides at the bottom of this article include example letters to help you write to HMRC. But if in doubt, seek independent advice from a tax professional, for example a Chartered Tax Adviser.
But what if you are on a low income and cannot afford to pay for advice? There are two charities which might be able to guide you through how to check the figures and explain how the calculations work. In some circumstances, they might also be able to help you to resolve queries directly with HMRC.
TaxHelp for Older People is a charity offering free tax advice to older people (broadly, aged 60 or over) with a net household income of £17,000 or less.
TaxAid helps low-income taxpayers who cannot afford to pay a professional.
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If you owe under £3,000 and you have sufficient continuing PAYE income in 2012/13, the underpayment will be included as a deduction from your allowances in 2012/13. HMRC will try to collect the underpayment in one year.
If it cannot be collected through your PAYE code, HMRC will contact you about arranging to pay.
State pensioners
In January, we reported that the Government had agreed not to collect tax for earlier years from state pensioners where HMRC had failed to tax their State pension correctly.
HMRC do intend, however, to collect underpaid tax from this same group for 2010/11, although they plan to collect it over three years rather than all at once or through just one year’s PAYE code.
Some pensioners will have had their liabilities written off for earlier years because HMRC failed to account for the State pension in the pensioner’s coding. This error continued for some pensioners into 2010/11, but HMRC took no action in that year, either to ensure that a new underpayment would not arise or to advise the pensioners that there would be another underpayment to budget for. These pensioners have been badly treated.
Such pensioners have a case for the tax underpayment arising through this continuing error in 2010/11 to be written off under ESC A19. However, HMRC are unlikely to accept this argument other than in exceptional circumstances.
Low-income pensioners who find that extra tax repayments cause financial hardship should investigate whether they are entitled to claim Pension Credit (or extra Pension Credit, for existing claimants), as entitlement to this benefit should be calculated on your after-tax income.
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If collection of the underpayment via your PAYE code or payment directly to HMRC will be difficult for you financially, contact HMRC as soon as possible to negotiate. You may be able to arrange to have the tax coded over a longer period or to pay in instalments, although there may well be an interest charge if you spread the payments.
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If you are on a low income, it is quite possible that the extra tax you are paying will affect your entitlement to means-tested benefits. You should contact JobCentre Plus, The Pension Service and/or your local authority to advise them of your reduced income due to the tax you are paying and ask how it affects your entitlement. Alternatively you can seek a benefits review from Citizens Advice.
Note, however, that paying more income tax does not make any difference to your tax credits entitlement.
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The guides are in two versions:
1. pdf files (can be read and printed)
LITRG guide to employer or pension payer error
LITRG guide to Extra-statutory Concession A19
LITRG guide to complaining about misleading information from HMRC
Example letters regarding tax underpayments – adjustments and explanation requests
Guidance for earlier tax years – 2007 to 2010 – can still be accessed from our archive.
2. Rich text format files (these are Word files which can be edited once downloaded)
LITRG guide to employer or pension payer error
LITRG guide to Extra-statutory Concession A19
LITRG guide to complaining about misleading information from HMRC
Example letters regarding tax underpayments – adjustments and explanation requests
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