Almost £6bn paid to HMRC due to wrong tax code

Adults in the UK have paid £5.8bn in overpaid tax to HM Revenue and Customs (HMRC) as a result of being on the wrong tax code, Canada Life has found.

In research by the firm, it was found that one in six (15%) UK adults stated that they do not know if they are on the right tax code.

It was also revealed that almost a third (31%) of adults in the UK, who have checked their tax code, found that they have been on the wrong code at some point, with 6% finding that they have been on the wrong code in the last 12 months.

Three quarters (75%) of those who have found that they were on the wrong tax code have been overpaying HMRC by an average of £689, which equates to £5.8bn as a nation.

The research also found that almost one in five (18%) of UK adults have never checked their tax codes, with those who have doing so, on average, once every 16 months.

Brits most commonly check for no specific reason (19%) or out of habit (17%), while others have done so due to a job change (12%) or having been on the wrong tax code before (8%).

Tax and estate planning specialist at Canada Life, John Chew, said: "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.

"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.

"Understanding your tax code is vital to ensure you’re paying the right amount of income tax. Those who are not on the right code may find themselves out of pocket. If it’s wrong, you may end up contributing more or less than you’re supposed to. So, if you haven’t checked your tax code(s) recently, now is a good time."

Among UK adults, less than half (42%) know that their tax code is currently correct. Furthermore, almost two in five (39%) don’t know what any of their tax code means, leaving them at a disadvantage in the first place.

Over two thirds (69%) say they don’t know the rules around claiming back over overpaid tax.

Less than one fifth have employed professional services to sort their personal tax (18%), which is down from three in 10 from 2023’s study (29%).

Chew added: "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 found you have been on the wrong tax code, you may be owed a rebate, or you may owe money to HMRC. HMRC may already be aware of this in which case you should be sent a tax calculation letter (a P800 form) or a simple assessment letter by the end of the tax year (April 5th), which will tell you how to pay HMRC or reclaim overpaid tax. You will only be sent one of these forms if you are employed or receive a pension.

"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."

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