All UK workers are being urged to check their payslip for a specific code that could be worth £689, after HMRC received an estimated £5.8 billion in overpaid tax due to incorrect tax codes. Canada Life found that nearly one third of UK adults who inspected their tax code were on the wrong one, with approximately 6% having been on an incorrect code in the past year.
Overpayments and Frequency of Checks
Three quarters of those who found they were on the wrong tax code have been overpaying HMRC by an average of £689, totaling £5.8 billion as a nation. However, those who have checked their tax code have only done so on average once every 16 months. Among all UK adults, less than half (42%) know that their current code is correct. Moreover, almost four in ten (39%) don’t understand what any of their tax code means, leaving them at a disadvantage.
Expert Advice on Tax Codes
John Chew, a tax and estate planning specialist at Canada Life, emphasized the importance of understanding your tax code, stating it is "vital" as it determines how much tax you pay. He explained: "Your tax code is made up of a series of numbers and letters and HMRC uses this to work out how much income tax you pay. 1257L is commonly used where you have one source of income, either through a job or pension, and means you can earn £12,570 a year (your personal allowance) before you start paying income tax."
Chew added: "You should have a different tax code for each income stream you receive, whether that is through work or via a pension. Your tax code can vary from the standard if you receive benefits from your job, such as a company car or healthcare. HMRC can also apply a different tax code if it wants to claim back tax you’ve underpaid."
Steps to Check and Correct Your Tax Code
Chew advised: "If you think your tax code is wrong, you need to contact HMRC directly. Your employer (if relevant) won’t be able to do this for you. You can check HMRC has your correct, up to date information online. If you’re on the wrong code you might need to update your employment details, or whether you’ve had a recent change in income."
If you have been on the wrong tax code, you may be owed a rebate or owe money to HMRC. HMRC may already be aware and should send a tax calculation letter (P800 form) or a Simple Assessment letter by the end of the tax year (April 5th), which will tell you how to pay or reclaim overpaid tax. This applies only if you are employed or receive a pension.
Time Limits for Reclaiming Overpaid Tax
Chew stressed the importance of acting promptly: "Remember, there are time limits to reclaim overpaid income tax, which is four years from the end of the tax year in which you are trying to claim so if you are in any doubt, the earlier you contact HMRC, the better."
