What you need to know...
Millions of employees across the United Kingdom have paid more income tax than necessary due to errors in HM Revenue & Customs (HMRC) tax codes. Official estimates indicate that around 5.6 million workers overpaid their income tax during the 2023-24 tax year, with the total value of overpayments reaching approximately £3.5 billion.
These errors stem mainly from outdated or inaccurate information held by HMRC, highlighting an ongoing challenge within the Pay As You Earn (PAYE) system. Tax experts and public figures are urging workers to regularly review their tax codes to ensure accuracy and to prevent financial loss.
Widespread Overpayments Identified
Recent figures reveal that an estimated 5.6 million people in the UK were affected by overpaid income tax in the last tax year. The financial impact of these mistakes is significant, with overpayments totalling around £3.5 billion for the 2023-24 period.
This issue centres on the incorrect allocation of tax codes, which determine the amount of income tax deducted from an individual’s salary through the PAYE system. According to HMRC’s operational data, these tax code errors primarily affect those whose personal or financial circumstances have changed but have not been accurately updated in the department’s records.
The scale of the problem underscores the importance of regular review and revision of personal information stored by employers and HMRC.
Causes of Incorrect Tax Codes
Tax codes dictate how much income tax is withdrawn from each pay packet. Errors can arise from various factors, including outdated income records, changes in employment, or incorrect processing of benefits and allowances.
Failure to update HMRC with current employment details or changes in salary can result in individuals receiving an incorrect tax code. Lee Murphy, Managing Director of The Accountancy Partnership, explained that “there are all sorts of reasons that can cause your tax code to be wrong, but it's something you're going to want to sort out straight away so you're not out of pocket.
” He highlighted that HMRC may estimate income based on old or incomplete information unless proactively updated by the taxpayer.
The Impact on Employees
Mistakes in tax codes can have a considerable financial impact, with some employees paying more tax than they owe, and others potentially contributing less than required. Overpayments are often noticed late, putting strain on household budgets until recovered.
Conversely, underpayments can result in significant bills later, which can be financially distressing. Murphy further warned that many people “assume that because tax is deducted automatically through PAYE, the amount must be correct, but tax codes are based on the information HMRC has about your circumstances.
” Outdated or inaccurate data can therefore lead to longstanding errors, especially if left unchecked.
Guidance from Tax Experts
Tax professionals advise employees to routinely review their tax codes, which are printed on payslips, annual P60 forms, and visible in online HMRC accounts.
Checking the accuracy of this information is particularly important after a change in job, salary adjustment, or personal circumstances. Murphy recommended, “Taking a moment to check your tax code when you start a new job, receive a pay rise or change circumstances can help ensure you're paying the correct amount of tax.”
Additionally, experts suggest contacting HMRC or seeking advice from an employer if something appears amiss. Prompt action can prevent unnecessary deductions and support timely refunds where overpayments occur.
Public Awareness and Responsibility
Financial broadcaster Martin Lewis has emphasised the need for public engagement with personal tax affairs. Speaking in a recent podcast, Lewis stated, “If you’re an employee you need to [know your tax code], because millions of them are wrong each year and if they are wrong, legally it’s your responsibility not your employer’s and not HMRC’s, to ensure it’s correct.”
Lewis also warned that persistent errors can result in large tax bills if underpayment is discovered later, potentially catching individuals unprepared. He advised, “each year when you get your tax code you should check it, and if you’ve never checked it before, it’s worth going and finding it now and doing a check.”
Final Summary
The discovery that 5.6 million people overpaid income tax in the 2023-24 tax year serves as a stark reminder of the importance of regularly reviewing personal tax codes. With total overpayments estimated at £3.5 billion, workers are urged to remain vigilant and proactive in managing their tax affairs.
Checking payslips and communicating changes to HMRC can prevent financial hardship and ensure accuracy in future tax years. For those wishing to better track their tax and financial details, digital financial tools such as the Pie app can provide additional support alongside official HMRC resources.
