20 Mar

Whose Fault is Underpaid Tax?

Desk with documents

Underpaid tax: your fault, or someone else's?

If you’re employed or receive a pension, HM Revenue and Customs (HMRC) checks whether you’ve paid the right amount of tax every year.

This 'PAYE reconciliation' checks whether the tax collected from pensions and salary under PAYE was the correct amount. You’ll receive this in the form of a P800 or Simple Assessment letter.

But, mistakes can be made.

These mistakes may be made by the PAYE system, if you have multiple jobs or several pensions, by your employer. or your accountant (check out the 5 signs you've picked a bad accountant).

But whose responsibility is it to pay back this underpaid tax? We’re here to help make the situation a whole lot clearer.

What could count as a tax error?

According to the government, these are the most common errors employers or pension payers make in the deduction of PAYE:

  • Not using the right tax code at the start of employment
  • Using a tax code without HMRC authority
  • Using a new tax code when one has not been issued
  • Failing to operate tax codes sent electronically by continuing with out-of-date tax codes
  • Incorrect use of the PAYE Taxable pay tables
  • Mistakes in setting up software for use in the new tax year
  • Failure to follow guidance issued in Employers Help books or Bulletins
  • Addition or mistype of pay figures

When is it the employer’s fault?

HMRC tends to cause a little confusion by demanding the payment of underpaid tax from employees, rather than the employer or pension provider.

However, where the employer/pension provider has not used the correct PAYE code and this causes any tax not to be collected, it remains their responsibility, not yours. 

Seek help from your accountants to check your P800. You’ll need to provide them with the PAYE codes issued to you for the tax year, and payslips from your employer or pension provider to check what PAYE codes they have used.

If you think that it’s the fault of your employer, then you can ask them to check their records, or HMRC can check them, to be sure they made the error.

If the enquiry finds that it is in fact the employer’s fault, then they will have to pay the underpaid tax amount.

HMRC will give the employer/pension payer a chance to offer an explanation. If the error was made in good faith, and they offer a reasonable explanation, then HMRC will conclude that the employee must pay the underpaid tax sum.

When is it HMRC’s fault?

If HMRC has ignored information you or your employer have provided on more than one occasion, or if it has left years of tax errors without informing you, then it will have to pay sum.  

If you think HMRC has made the mistake, you can ask it to write-off the tax owing under Extra Statutory Concession A19.

Beware though: it’s very reluctant to use this concession, so it might be worth getting a professional to help argue your case.

How much time do I have to repay the tax?

In most cases, HMRC will allow 12 months to repay the tax. In special cases, it could allow up to 36 months.

If you can’t afford to pay back the whole sum at once, then HMRC may let you do it in instalments.

 

Want to avoid any unwanted underpaid tax bills in the future? We’d be happy to help.

 

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