Introduction
More than five million workers in the United Kingdom have paid excess income tax due to incorrect tax codes issued by Her Majesty's Revenue and Customs (HMRC), according to leading accountancy firm UHY Hacker Young. The group estimates that £3.5 billion was overpaid last year as a result of these errors.
HMRC is not legally bound to warn individuals of tax overpayments or automatically process refunds, leaving millions potentially unaware they are entitled to reclaim money. Accountants are now calling on workers to actively review their tax codes and year-end PAYE summaries to avoid missing out on compensation.
Scale of HMRC Tax Overpayment
Recent analysis from UHY Hacker Young shows that in the previous tax year, approximately 5.6 million people were affected by overcharges, collectively amounting to £3.5 billion in excess payments. The majority of these overpayments have arisen through the Pay As You Earn (PAYE) system, an automatic method for collecting income tax from earnings and pensions.
Official HMRC data confirms that tax code errors are a known source of unintentional overcharging. Although HMRC issues annual statements and tax calculations to reconcile accounts, significant sums often remain unclaimed due to lack of public awareness or action.
Responsibility for Identifying Errors
Accountants and tax specialists have stressed that HMRC is under no legal obligation to inform individuals of tax code mistakes or refunds resulting from overpayments. Neela Chauhan, Partner at UHY Hacker Young, stated, “Many people are paying the wrong amount of tax simply because HMRC is estimating their earnings.
For some, these errors remain unnoticed.” Taxpayers are instead required to scrutinise their pay slips and year-end tax statements to check whether they have paid too much or too little tax, as refunds are not issued automatically in all cases.
PAYE System and Tax Code Issues
The PAYE system operates based on tax codes, which are combinations of letters and numbers designating personal allowances and specific taxpayer circumstances. HMRC assigns these codes for each tax year, with the most common code for the current year being 1257L,
representing the standard personal allowance of £12,570. Mistakes can arise when income changes, new benefits are received, or individuals have multiple sources of income. Accountancy firms have pointed out that coding errors occur most frequently among those with non-PAYE earnings, such as freelance work or company benefits, as these are often unreported in real time.
Official HMRC Notifications and Processes
If a taxpayer has overpaid or underpaid, HMRC may send a P800 tax calculation letter or a Simple Assessment letter following the tax year’s end on 5 April. These letters explain how to claim a refund or pay any shortfall owed. However, letters are not guaranteed in every instance of error, particularly if HMRC lacks updated information.
Notification of code changes takes place via a P2 ‘Notice of Coding’. Employers and pension providers receive real-time updates to implement revisions through payroll systems, but the onus remains on individuals to monitor these updates and respond where necessary.
Advisers Urge Vigilance from Taxpayers
UHY Hacker Young has urged all employees and pensioners to check tax codes regularly, especially those with complex financial arrangements or shifting employment circumstances. “HMRC will not always correct overcharging mistakes automatically,”
Chauhan warned. “If you do not check your tax code or PAYE calculation, you may never reclaim your money.” Taxpayers are advised to log in to their HMRC online account or review paper documentation to confirm their code and ensure it accurately matches their current circumstances.
Final Summary
Millions of UK workers may have overpaid income tax last year due to widespread tax code errors, as highlighted by accountancy professionals. With HMRC not always issuing automatic refunds or notifications, individuals must proactively check their tax records to avoid missing potential repayments.
This issue highlights the complexity of the UK’s PAYE system and the need for greater public awareness. For further guidance on managing tax codes, individuals can consult the HMRC website, discuss with financial advisers, or access dedicated tools such as those available in the Pie app.
