Are you in line for a tax rebate?

Her Majesty’s Revenue and Customs has checked its sums on the amounts of tax and national insurance paid in recent years – and it seems they may have got them wrong.

As a result, around six million people can look forward to tax rebates of around £300, but an unlucky one million will be told they have underpaid by up to £600.

Channel 4 News has spoken to the experts at the Chartered Institute of Taxation about how this happened and what it means – as well who is likely to be affected.

Why has this happened? Is it a blunder?

There are two separate issues here – the end of year PAYE reconciliation for last year (2010-11) and the clearing of a backlog of PAYE reconciliations for the years 2003-8.

PAYE (Pay-As-You-Earn) is the way most people in work pay income tax and national insurance, by having it deducted from their wages (or other income such as a pension) through the year.

This usually works fine if you have one stable source of income through the year, but if you have multiple income sources, change jobs, move in and out of work through the year or receive benefits in kind (e.g. a company car) it can get complicated and you can end up paying too much or too little tax. The reconciliation process is when HMRC pull together the information about your income and tax over the past year and, if necessary, send you a demand or a refund.

It is unfair to say the 3.5 million letters going out as part of this year’s process are a blunder.

While PAYE continues there will always be a need for an annual reconciliation process, so it is unfair to say the 3.5 million letters going out as part of this year’s process are a blunder.

However, there is more HMRC could do to increase the number of people paying the right amount of tax in-year. There will also be some people who feel legitimately aggrieved that, if HMRC had processed their correspondence promptly and accurately, they would have paid the right amount of tax in the first place.

HMRC deserve criticism for letting such a huge backlog build up – costing the Exchequer significant amounts of money which have been written off, and delaying the return of money owed to taxpayers. However the six million rebates due by the end of 2012 are a sign of progress, showing that they are getting to grips with these historic cases.

Is it likely to happen more or less in the next few years?

It should happen less in the years ahead.

The six million rebate letters should be a one-off. HMRC’s new NPS computer system which, although it had a few teething problems, now does most of the reconciliation work automatically and means backlogs will be unlikely in the future.

HMRC are developing a new system of “Real Time Information” (RTI). From 2013 employers will be required to submit PAYE information to HMRC on a weekly or monthly basis, instead of the current annual returns. This should eventually enable HMRC to update coding notices in a more timely way, helping taxpayers pay nearer the right amount of tax in-year.

Additionally HMRC are getting better at matching up records on their system – things like spotting that records for Robert Smith and Bob Smith are for the same person – but employers too need to ensure they use the full correct information.

Read more: Millions set to receive tax rebates

Who is likely to be affected?

Those likely to be affected include people who: have more than one source of income, including the retired with multiple pensions; have unpredictable income, reliefs or taxable benefits; receive benefits in kind from their employer – such as a company car – where the value of the benefit might not be known until the end of the tax year; or have overlapping employments – e.g. because they start a new job before they finish the old one.

When will people have to pay back the tax? And what will happen if they can’t pay?

First, check if HMRC’s calculation is complete and correct. This applies even if you are being told about a rebate. Contact HMRC if you think it is wrong.

Contact HMRC if you think it is wrong…if you owe money, don’t panic.

If it is a rebate, and you are satisfied it is correct, you do not need to do anything. You should get the rebate, with interest (if applicable), automatically without having to call HMRC.

If you owe money, don’t panic. Amounts under £3,000 can usually be “coded out” over the next tax year (i.e. 2012-13 for the letters about to go out). This means paying extra tax in each month. If this will cause hardship you can ask to have coded out over up to three years.

Taxpayers who are on means-tested state benefits and who are notified that they owe tax should contact the DWP, as some benefits are calculated on net, after-tax, income. So the additional tax liability could mean you are entitled to more benefits.

If the tax underpayment was your employer’s or pension provider’s fault e.g. for not operating correctly the code given to them by HMRC, then in strict law HMRC must first ask them to make good the shortfall. There are also some limited circumstances in which you might be able to get the tax written off, if you can show HMRC to be at fault. There is more information on these points on the website of the Low Incomes Tax Reform Group.