Claim £1,300 of your tax back

Nobody likes paying tax. But thanks to a new blunder, you might be paying over £100 a month more than you should be...

Thanks to a new blunder by HM Revenue & Customs, we all need to start being extra vigilant when checking the tax code on our payslips.

Revenue & Customs is issuing around 25 million tax coding notices this year, between January and March, a way of informing us what our tax codes should be for the next financial year - and how much tax we therefore should be paying each month.

However, perhaps inevitably, they've made a hash of it, and a huge number of the codes sent out are wrong. Indeed, some reports have suggested people have received multiple codes - and they have all been wrong!

Such a massive gaffe could really hit those affected in the wallet - according to the Chartered Institute of Taxation, taxpayers could be asked to pay as much as £108 a month too much! Over a year that adds up to just shy of £1,300!

That's not small change in anyone's book.

Why has this problem surfaced?

This has all come about, perhaps unsurprisingly, due to technology. Revenue & Customs has moved over to a new system for National Insurance Contributions and PAYE (Pay As You Earn).

According to the Chartered Institute of Taxation, somewhere along the way the new system has combined some workers' current employment details with old data from previous jobs, resulting in the worker appearing to have a far higher income than they actually do, and therefore qualifying for a different tax band.

It also doesn't help that this year around 25 million coding notices are being sent out, double the number last year.

A pretty spectacular blunder, quite honestly.

So how do you make sure you only pay as much tax as you are supposed to?

Numbers and letters

If you take a look at your tax code, you should see a couple of numbers and then a letter. The number corresponds to how much money you can earn before paying tax - multiply it by ten, and that's how much you can earn before the tax man starts taking a slice.

The most common number is 647, as for most people it's only once you earn more than £6,475 that you start paying tax.

The letter refers to your tax status, and how that status affects the preceding number. So most of us will have the letter L, as we only qualify for the basic Personal Allowance (i.e. how much you earn before you get taxed). People aged 65-74 will have the letter P, as they are eligible for the full Personal Allowance (almost £9,500), while those over 75 will have the letter Y.

However, if you have two or more sources of income your code may be a little different - either two letters and no number, or the letter D followed by a zero.

It gets even more confusing if you are receiving income from two separate pensions, or from both a pension and a job, as you will have multiple codes to try and keep on top of.

I'd recommend having a read of this section of Revenue & Custom's website as it gives a decent breakdown of the different codes and what they mean.

Changes that affect your tax code

It's not just down to Revenue & Customs to keep up with how much tax you should be paying - you should inform them of certain changes in your own life that affect your tax liability.

For example, older people are entitled to a Married Couple's Allowance, while if you start to receive a second (or even third) source of income, or the amount of untaxed income you receive changes, then you may be paying the wrong amount of tax.

You also might have to pay tax on non-cash benefits that your employer provides you with, such as a company car or health insurance.

DirectGov has a useful section on what changes you should inform your Tax Office of, and also of what benefits you might have to pay tax on, so be sure to give it a read.

What to do if your code is wrong

If you have checked your code and reckon there might be a mistake, or even worse you've been sent multiple codes, you need to contact your tax office - ok, you have until April, but this isn't the sort of thing you want to be putting off!

Have a look at the coding notice, and the relevant tax office should be detailed on there. If it's not, have a word with whoever deals with payroll at your employer and they should be able to point you in the right direction.

When you do contact your tax office, you'll also need your National Insurance number and tax reference to hand, so be prepared!

Don't put it off!

Because these new codes don't come into force until April, it can be pretty easy to just file them away and put off checking them. It's essential that you don't do this - Revenue & Customs need to be informed of any mistakes as soon as possible to correct them.

With their resources a bit overstretched by all accounts, it might take a little while for any changes to go through, so it pays to get it done now. If you're at all unsure about whether your code is correct, give the Tax Office a call.

Tax may be inevitable, but that doesn't mean you should pay more than your fair share!

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More: Seven ways to reduce your tax bill | Britain's most hated tax!

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