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HMRC admits millions have not paid correct amount of tax

HM Revenue & Customs (HMRC) has said that up to 4.7 million taxpayers will be sent letters later this year telling them they paid either too much or too little income tax in 2010/11.

Every year HMRC conducts a reconciliation exercise to check that people have paid the right tax via the PAYE system. Last September, HMRC faced severe criticism when it emerged that 5.7 million people had not paid the correct tax via PAYE for the years 2008/09 and 2009/10, which led to about 1.4 million people having to pay an extra £1,428 each on average, while about 900,000 taxpayers had their debts of up to £300 written off. The explanation given by the Revenue was that a new, more effective computer system had revealed previous calculation errors.

This year the reconciliation exercise for 2010/11 will take place in late July, and HMRC estimates that between 1.7 and 3.5 million people will be repaid an average of £340 each, while 1.2 million will owe £500-£600 each.

Cheques for people previously overtaxed are due to be sent out in August and September, and calculations for underpayments will be sent in batches after that, with the last going out in December.

Those presented with a bill will have time to challenge the calculations if they think they are wrong. If the challenge is unsuccessful then the money will be taken from their earnings each month via a change to their PAYE tax code for 2012/13.

Up to £3,000 per individual will be collected this time via PAYE, more than the previous limit of £2,000.

"We expect that hardly anyone will be faced with a bill larger than £3,000, but if they want to pay us in one go by cheque they can," said an HMRC spokesman.