How do employee tax errors arise?
It sometimes happens that an employee overpays or underpays tax within a tax year. Generally, this will be because HMRC have issued a tax code that doesn’t take all the relevant facts into account. This could be an HMRC error, but more frequently it is because they haven’t been given all the necessary information. Another possibility is that the employer or their payroll provider have failed to implement a tax code issued by HMRC.
What happens if the tax code used for an employee is incorrect?The employee will pay too much or too little tax. If they pay too much, then they should get a refund after the tax year has ended, assuming that HMRC eventually receive the information they need. This can take some time however, and it can’t be guaranteed that it will happen automatically.
If they pay too little tax, an employee will generally receive a notice some months after the end of the tax year stating the amount of the underpayment. The extra tax may be demanded as a lump sum payment, or the amount may be taken by adjusting the employee’s tax code for the next year. Either way, this is usually an unpleasant surprise for the employee.
Who is to blame when it goes wrong?
Many employees assume that HMRC and their employer are responsible between them to make sure the right amount of tax is deducted from their pay. Many employers would be familiar with a situation where an employee expects them to be able to alter a harsh tax code or blames them when they receive a demand for underpaid tax.
So, who is actually responsible for what?
HMRC regard the employee as primarily responsible to ensure that their tax code is correct and allows for everything it should. HMRC do not give the employer any information as to how the tax code is arrived at, so consequently they cannot check whether it is correct. The employer’s responsibility is to make sure they apply whatever codes HMRC issue.
The employer should notify HMRC of any changes to company cars and fuel benefit, but even on this the ultimate responsibility for making sure all is correct rests with the employee, and they should carefully check any coding notice they receive. Of course, a good employer will want to assist their employees as much as they can.
If an employee discovers their tax code is wrong, they should either call HMRC on 0300 200 3300 or use their online tax account. The following link can be used to set up an online tax account: https://www.gov.uk/check-income-tax-current-year/sign-in/prove-identity
What are the most common reasons for employees underpaying tax?There can be many and varied reasons for this, but the two that result in the most significant underpayment situations are failure to notify HMRC about a new company car/fuel benefit or major changes to these, and failure to register for self-assessment when the High Income Child Benefit Charge applies.
What about overpayments of tax that HMRC never pick up?There are circumstances where an employee may overpay tax and it is never noticed. This would usually be because HMRC never get the relevant information. Typically, this might be in situations where an employee is paid over £50k per annum and is making personal pension contributions or Gift Aid donations to charity that HMRC are unaware of.
If you think you could have employees affected by any of these points, it is best to act as soon as possible so that underpaid tax doesn’t accumulate, or opportunities get missed for reclaiming overpaid tax. We will be happy to help any of your employees who need to register for self-assessment or want help with assessing or reclaiming overpaid tax.
Please note: This article is provided for information only and was correct as at time of writing (14/09/21). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.