When people receive a PAYE tax coding notice from HMRC, they naturally assume that the information contained therein is correct. However this year, for a large proportion of people, that is not the case.

The Chartered Institute of Taxation (CIOT) and several leading contractor accountants are calling on the government to better inform the public about the effects of the tax coding errors. If left unresolved, thousands of people will have incorrect deductions from their salary and pensions payments which could run into hundreds of pounds.

The problem stems from a new PAYE system and has led to many people with one job receiving two or in some cases more, tax coding notices. The resulting error has a direct impact on an individual’s personal allowance by effectively splitting it across two or more jobs. This means that their employer, in accepting the tax code as correct, will be required to deduct more tax than is actually due.

For the vast majority of people in the UK, the personal allowance is £6,475 for the 2010-11 tax year. If this tax free figure is incorrectly applied to someone’s pay, it will cut a basic rate taxpayer’s net income by around £108 a month or £1,295 a year.

In addition to calling on HMRC to issue a public statement on the problem, the CIOT wants them to provide additional resources to deal with the expected upsurge in the number of enquiries, and to check the accuracy of all outstanding tax coding (P2) letters still waiting to be sent.

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