Employees unknowingly on the wrong tax code have overpaid HMRC by a staggering £5.8billion collectively, new research shows.
Data gathered by Canada Life shows almost a third (31 percent) of UK adults who have checked their tax code found they have been on the wrong code at some point. Up to six percent found they were on the wrong tax code in the last 12 months.
Three-quarters (75 percent) of those who have found they were on the wrong tax code have been overpaying HMRC by an average of £689, or £5.8billion as a nation.
The findings also show that nearly one in five UK adults (18 percent) have never checked their tax code.
Those who have checked their tax code have only done so on average once every 16 months.
Britons most commonly check for no specific reason (19 percent) or out of habit (17 percent), but others have done so due to a job change (12 percent) or have been on the wrong tax code before (eight percent).
John Chew, tax and estate planning specialist at Canada Life, commented: “Your tax code is made up of a series of numbers and letters and HMRC uses this to work out how much income tax you pay.
“1257L is commonly used where you have one source of income, either through a job or pension, and means you can earn £12,570 a year (your personal allowance) before you start paying income tax.”
“You should have a different tax code for each income stream you receive, whether that is through work or via a pension.”
People’s tax codes can vary from the standard if they receive benefits from their job, such as a company car or healthcare.
HMRC can also apply a different tax code if it wants to claim back tax people have underpaid.
Mr Chew continued: “Understanding your tax code is vital to ensure you’re paying the right amount of income tax. Those who are not on the right code may find themselves out of pocket.
“If it’s wrong, you may end up contributing more or less than you’re supposed to. So, if you haven’t checked your tax code(s) recently, now is a good time.”
If people think their tax code is wrong, they need to contact HMRC directly. Mr Chew said: “Your employer (if relevant) won’t be able to do this for you. You can check HMRC has your correct, up-to-date information online.
“If you’re on the wrong code you might need to update your employment details, or whether you’ve had a recent change in income.”
If people find they have been on the wrong tax code, they may be owed a rebate, or they may owe money to HMRC.
Mr Chew said: “HMRC may already be aware of this in which case you should be sent a tax calculation letter (a P800 form) or a Simple Assessment letter by the end of the tax year (April 5), which will tell you how to pay HMRC or reclaim overpaid tax. You will only be sent one of these forms if you are employed or receive a pension.”
Mr Chew added: “Remember, there are time limits to reclaim overpaid income tax, which is four years from the end of the tax year in which you are trying to claim so if you are in any doubt, the earlier you contact HMRC, the better.”
