Tax calculation chaos

It has been hard to miss the recent furore in the national press regarding Pay As You Earn (PAYE) underpayments and overpayments. There is no doubt that many taxpayers are affected.

“The vast majority of individuals do not need to worry. If you complete a self assessment tax return then you should not be affected at all because your tax liability should have been calculated correctly and your tax affairs should be up to date.

Those taxpayers who are affected should expect to get a tax calculation form P800 by Christmas 2010. If there is an overpayment it should be repaid automatically.

If there is an underpayment of less than £2,000 it will be collected through the 2011/12 tax code, or possibly longer if the taxpayer will suffer undue hardship. Underpayments of more than £2,000 must be paid directly, not through a code number.

This is normal for amounts over £2,000. Taxpayers may be able to seek time to pay by liaising direct with HMRC. In a surprise move, HMRC has announced it will write off “small” underpayments of less than £300, and those individuals will not be written to.

The P800 is not a demand but a tax calculation - a statement of what HMRC thinks the person’s tax position is. It is vital to check the P800 even if it shows an overpayment and a refund due. If there are errors, the taxpayer should tell HMRC.

If the calculation shows an underpayment and the demand seems to be correct, there are still situations where HMRC will agree not to recover any underpaid tax but these are rare. For example, where HMRC has had all relevant information but not made timely use of it.

If you have only held one employment during the period and have no other sources of income then you should have had the correct tax deducted.

If, however, you frequently move employments or have other sources of income then it is worth checking now that you have paid the correct amount of tax, especially if you are a higher rate taxpayer.

Richard Green
Personal tax adviser
Cassons chartered accountants and business advisers