HMRC benefits as new PAYE system issues wrong tax codes

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The introduction of new Pay As You Earn computer systems at HM Revenue and Customs means that many people are being sent, and will be sent in coming weeks, incorrect tax codes, according to the Chartered Institute of Taxation. 

When mistakes happen, it appears that taxpayers will usually pay more tax than they should, unless they spot the error and contact HMRC. 

The Institute says that HMRC is issuing around 25 million tax coding notices this year, double the number issued last year, and "a significant proportion of these are wrong".

HMRC's board of directors and commissioners have changed the way PAYE systems work, to give tax officials a single view of an individual's various employments.

Replacing Fujitsu mainframes with Accenture's NIRS2 system

Disparate tax records on the old Fujitsu-based COP [Computerization of PAYE] mainframes have been brought together on the more modern Accenture/Capgemini National Insurance Recording System (NIRS2), based at Newcastle.

Since NIRS2 holds one record on every individual in the UK, information on various employments can reside in that file.

So, for the first time, HMRC's tax officers are able to see at a glance when a person has more than one employer.

Extra PAYE tax income may help pay for system changes

HMRC board members hope they'll collect extra tax as a result of the changes, which will help justify the costs of the "MPPC" -  Modernisation of PAYE Processes for Customers - programme. 

The PAYE modernisation was due to cost £140 million between 2006 and 2011, and deliver £93 million savings over that period, according to figures released by the National Audit Office in 2008.

The wrong tax codes

But bringing together information on PAYE taxpayers has led, in some cases, to wrong conclusions about a taxpayer's affairs and, consequently, wrong tax codes being issued.

Andrew Hubbard of the Chartered Institute of Taxation told BBC Online that HMRC should have a publicity campaign to alert taxpayers to the potential problem.
 
He said:

"Most people on PAYE are used to assuming that what the taxman sends them is correct. But this year many of them are being given wrong information, and unless they spot it and tell HMRC, their employer will receive the wrong information too.

"They could get a nasty shock when they open their April pay packet and see it is as much as a hundred pounds lighter than they are expecting."

Tax codes have been sent out in batches in a process that started in the first week of January and which ends in the first week of March.

Mistakes could cut monthly pay by £108

If the whole of that personal allowance is wrongly applied that would cut a basic rate taxpayer's pay packet by about £108 a month or £1,295 a year.

The tax code goes first to individual taxpayers in a P2 notice for them to check, before being sent to their employer.

Some people are receiving two or more more coding notices which are different.

"At the end of the day you pay too much tax"

Nick Brand from Fareham in Hampshire, who works full time for a supermarket, said this had happened to him.

Last year he did a day and half's work for a friend's IT firm, earning £150 declared as required via a P46 form.

Last November he was sent two coding notices, allocating £1,318 of his annual allowance to the income from his temporary work, and allocating the remaining £5,157 to his main job.

That has been repeated in the two coding notices he received on 3 January for the 2010-11 tax year, even though he has no intention of repeating last summer's temporary work.

"It's not good, at the end of the day you pay too much tax," he said.

HMRC issues denial - as if by habit

Far from publicizing the problems, HMRC denies anything is seriously awry - a position the department usually takes when under attack.

It says that PAYE changes have improved things for taxpayers and the department.

An HMRC spokesman told the BBC that it is sending out more tax codes than usual as a "natural feature of the new system".

The spokesman said the new system: "creates a single record for customers for the first time, and this, together with increased automation compared to previous years, is resulting in many more people having more accurate codes than before."

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HMRC database "fails to distinguish" between old and new jobs

But the Chartered Institute of Taxation said HMRC's database was failing to distinguish between current jobs and old ones, leading to tax codes being calculated on the assumption that someone has more than one job.

It said this was resulting in some people having their personal allowance split between two jobs, or allocated entirely to a job they no longer had, which would force their current employer to deduct too much tax.

"The personal allowance will be £6,475 for most people under 65 in 2010-11," said the Institute .

In a few cases the Revenue computer system has removed the personal allowance on the assumption that the person's income will be higher than £100,000.

Earners above this level will lose their personal allowance this coming tax year, in a measure first announced by the Chancellor in the 2008 pre-budget report.

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Thank you to PAYE expert Matt Boyle for help in compiling this article

Links:

Warning to taxpayers to check their tax codes - BBC Online

Payroll World - its website

Is HMRC locked into Accenture indefinitely? - IT Projects Blog

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