If you have recently received a new tax code, it is important to review it carefully. Many taxpayers assume their code is correct, but mistakes can and do happen—sometimes leading to significant overpayments of income tax.
Millions in Overpaid Tax
A recent Freedom of Information request submitted by a leading UK accountancy firm revealed concerning figures for taxpayers. According to data released by HM Revenue & Customs, an estimated £3.47 billion in overpaid income tax was owed to approximately 5.6 million taxpayers during the 2023/24 tax year.
One of the primary reasons cited for these overpayments is errors or inaccuracies in Pay As You Earn (PAYE) tax codes.
What Is a PAYE Tax Code?
If you are employed or receive income from a private pension, you will usually have one or more PAYE tax codes. These codes are calculated by HMRC and sent to your employer or pension provider to ensure the correct amount of tax is deducted from your income.
You may receive your tax code through a paper PAYE coding notice, which is often issued before the start of a new tax year. If you do not receive a paper notice, you can review your tax code online through your personal tax account with HMRC.
Why PAYE Codes Matter
The PAYE system has been in place since 1944 and remains a central part of HMRC’s efforts to collect the correct amount of income tax, particularly for individuals who do not complete a Self Assessment tax return.
Although your PAYE code appears as a simple number and letter combination, it is based on a detailed calculation that considers several factors.
Your Tax-Free Allowances
Your tax code includes any tax-free allowances you are entitled to. This usually includes your Personal Allowance for each income source, along with other allowable deductions such as work-related expenses that qualify for tax relief.
Deductions for Tax
Your code may also include deductions to account for taxable benefits or additional tax liabilities. These can include:
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Company car benefits
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Estimated tax on savings or investment income
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Underpaid tax from previous tax years
Why Underpaid Tax Can Cause Confusion
The way HMRC collects unpaid tax from previous years can often be misunderstood. It involves estimating your marginal income tax rate and adjusting your tax code accordingly.
For example, if you owe £1,000 in tax and are a higher-rate taxpayer paying 40% income tax, HMRC would reduce your tax-free allowance by £2,500. This ensures that the additional tax collected through PAYE equals the £1,000 owed.
What To Do If Your Tax Code Is Wrong
If you believe any information used to calculate your tax code is incorrect, it is important to contact HMRC directly. Employers and pension providers cannot change your tax code—they must apply the code they are given.
Changes in circumstances, such as receiving a new company car, starting or stopping benefits, or changes to income levels, can all affect your tax code. Even small errors can result in overpaying or underpaying tax, so reviewing your code regularly is essential.
Getting Professional Support
Understanding your tax code and ensuring it accurately reflects your financial circumstances can help prevent unnecessary tax payments and avoid unexpected liabilities later.
The team at Chartwell Wealth Management can help you review your tax position, identify potential errors and ensure your finances are structured as efficiently as possible. If you would like expert guidance tailored to your circumstances, we invite you to contact our advisers today.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
