According to Her Majesty's Revenue and Customs (HMRC), many people end up paying too much or too little Income Tax each year, but don't understand why. HMRC have estimated that in the last tax year alone in the UK, over 5 million taxpayers either under or overpaid taxation. For those taxpayers notified that they had overpaid tax, the average tax rebate was estimated to be £379. Taxpayers told that they had underpaid their taxes, needed to make an additional tax payment averaging £537 to HMRC.
HMRC says it is important to know how to check you're paying the right amount. Any underpayments will largely be collected by adjusting your tax code, meaning that you could take home less pay each month. HMRC quotes the main causes of incorrect payments as changes to benefits in kind provided by employers, people moving jobs frequently with gaps between employment and taxpayers having more than one job or pension, with tax-free allowances spread between them.
HMRC depends on accurate and up to date personal finance information about individual taxpayers and if you are not personally handling your tax affairs, the accuracy depends upon someone else, for example your employer, accountant or pension provider. Every year, HMRC checks that the amount of tax and national insurance deducted in-year matches the information held on its records in an "end of year reconciliation" process. HMRC provides every taxpayer with a Tax Code. This is used by your employer, accountant or pension provider to calculate the amount of tax to deduct from your income.
If your code is wrong, you will pay either too little or too much tax and if the 'end of year reconciliation' picks this up, you could either find yourself with a nice surprise; a refund, or, more significantly, a nasty shock; a demand for hundreds, or even thousands, of pounds, as HMRC claws back the money you should have paid. Incorrect tax calculations highlight the need for the self-employed, employers and employees to keep HMRC informed of any changes in circumstances.
One way in which you can try to avoid unpleasant end of year tax demands, is to understand and check your tax code. Don't bin it, file it or lose it without checking that it is correct. Your tax code determines your current income tax liability and informs your own and HMRC's calculations of income tax. A wrong tax code leads to wrong tax payments.
As well as getting a tax code notification from HMRC for each tax year - usually in your PAYE Coding Notice, you can find your tax code on a pay slip, on P60 and P45 forms, or by going online if you are enrolled for Self-Assessment. Checking that the different letters and numbers that make up your tax code are correct is relatively easy and certainly important, particularly if you've got more than one job or source of income, or if you change jobs a lot. HMRC provides information on how to read and understand your tax code.