This is an urgent call for every employee in the UK to check their tax code. Miss an error and it could cost you £1,000s.
The new tax year is upon us and, while it seems an innocuous few digits, your tax code instructs employers how much to take from your pay packet. In recent years, millions of these codes have been wrong, so it is crucial you check yours immediately. While you are at it, scrutinise past codes too, as you may be able to reclaim huge amounts of overpaid tax.
treat The new tax year as a fresh start
The amount of tax you pay is worked out depending on your earnings over the tax year, which started on 6 April 2011 and ends 5 April 2012.
If you are a company employee, your company's payroll automatically deducts your tax. Each year the Inland Revenue sends a new 'tax code' to employers, telling them how much to let someone earn before the deductions start.
Mistakes are common
Frankly, the entire system has been a sham and a scandal. In the two years to April 2010, the government taxed us an estimated £1.8 billion more than was due, leaving over four million people in line for rebates.
On top of that, a further 1.4 million people were not asked to pay enough tax, an average of £1,400 each. Many have since been asked to pay that back - even if they spent it. That is just the tip of the iceberg though as many more past errors are thought to have remained hidden. And in the past few weeks, we heard about another 150,000 pensioners who were given the wrong code.
Many people rightly blame the revenue, yet a big contributing factor was employers not passing on the right documents when staff changed jobs, putting 'dirty data' in the system.
Whoever is to blame, the lesson is clear: you must check your code.
Understanding your code
If you are under 65, have one employer, no employee benefits and earn under £100,000, your 2011/12 code will probably be 747L.
The 747 bit stands for the amount you can earn before tax; just add the digit 'five' on the end to get the exact amount. In other words, 747 becomes £7,475, the basic personal allowance most people get. 'L' is the most common tax category.
Lots of small things can change this, such as multiple jobs or company benefits such as medical insurance.
How to check for errors:
Anyone can have an error on their code, but those who answer yes to one or more of these questions are most likely to.
● Have you changed jobs in the last few years?
● Do you have more than one income?
● Do you get employee benefits, such as a company car/dry-cleaned uniform/medical insurance?
● Are you over 65?
For those who have been sent a 'coding notice' (not everyone gets one), checking is easy. Go through the explanation on the letter to see if anything seems wrong. Is the right job listed as your main employment? Do you have the benefits listed?
If you don't have the letter or find it complex, try www.taxcodechecker.com, which lets you enter your tax code for this year (or past years) and gives an indication of whether it is correct.
If you have not got a notice of coding, find your code on your payslip, P45 or P60 (ask HMRC if you don't have this). Just as important as checking this year's code is checking past year's codes (find them on your P60). You may be one of at least four million people who have overpaid in the past two years.
Crucially, each income source (job, private pension) will have different tax codes, so check them all.
What to do if you think it's wrong?
If you think this year's code is wrong or you have overpaid, solving it is simple. Just call the Revenue and it should amend your code or send a cheque if you have overpaid.
The record reclaim I have had reported is over £5,000, so it is well worth a five-minute check.
The situation is trickier for those who unwittingly paid too little and the HMRC said: "Give us the money." The only escape is to ask for an 'A19 statutory concession', where the Revenue gives up any tax if it incorrectly followed procedures.
There are a lot of caveats, but a parliamentary question recently revealed 25 per cent of people who tried were successful - far more than expected.
For further information, see www.moneysavingexpert.com/taxcodes