Underpaid income tax being repaid

BrunoM

Hi all

In rather bad news, I just got a tax letter telling me I owe around £1800 from 2008/9 income tax underpayment. Looking online and reading old payslips I see that in fact I was indeed on basic rate tax code throughout 2008/9 tax year, which obviously is something I could and should have spotted. I don't know why my tax code was changed by payroll to BR, when up til the last month of the previous tax year I had been on a normal tax code (522L or whatever), but there it is.

My question is, how fast am I required to pay it back, and what flexibility is there, if any? It reads like it will be automatically deducted from salary going forwards - so does that mean £1800, spread equally over the months from now til the end of the tax year (ouch)? Any alternatives possible? Will my shouting at payroll achieve anything whatever?

Thanks.

sprogs

Unless you are a high earner I thought being on basic rate meant you paid more tax than you should, not that you paid less and therefore had to pay it back.

BrunoM

I'm a high earner. So a part of my income was taxed only at basic rate not higher, which looking at old payslips may well have been the case. As I say, I should've spotted it, but as I'm an employee with a payroll department, and my salary didn't change from 07/08 to 08/09, it didn't really occur to me that there could be any confusion like this.

sprogs

I think I would be asking payroll for some explanations then, sounds like their mistake. At the very least your company could offer some assistance when it comes to paying it back - interest free loan or similar.
A friend was overpaid for 4 months when she started a new job, she didn't get a payslip either so hadn't noticed it. Her company took the money back over 4 months rather than in one go. Hopefully you might be able to negotiate something similar - good luck.

DVardysShadow

Communicate with the tax office, see if you can pay a bit off now and let them take the rest by PAYE in 2010/11. I think they are usually OK about that sort of thing

bristol_pilot

You can either pay it in a lump sum in January (e.g. by cheque), or ask for next year's tax code to be adjusted so it gets paid back automatically over the next tax year.

BrunoM

Thanks guys, sounds manageable hopefully. Gah.

trevormax

If they just apply it to your tax code (which is what many people do) then at £1,800 you will be paying £150 per month more in tax for 1 year. They will do this by reducing your tax code. If you are well into the higher rate tax band (and it looks like you are to have underpaid by £1,800) then they should reduce your tax code by £4,500 next year.

BrunoM

Thanks again for the advice, all. I spoke to the tax office and my payroll, managed to make things quite a lot more complicated:

1. I have been on BR tax code since start of 08 tax year, therefore all 08/09 but also 7 months this tax year.

2. I contribute to a company pension for which I've been receiving basic-rate credit directly into the pension, but not higher rate tax relief (again, looks like since start of 08 tax year).

3. I was told that the tax office would change my tax code to reflect higher-earner-with-pension-tax-relief. They said I should expect a lump sum in the first month after the change, to reflect the pension credit outstanding from previous months.

4. I was told that the outstanding underpayment from 08/09 would be taken by a change in tax code for 10/11 tax year.

So - I was expecting
a change in tax code this month which would mean I was paying some more tax each month for the rest of this tax year (a bit of credit for the monthly pension relief, but a significantly larger debit for being on higher-earner tax rate, ending up as an overall reduction based on monthly earnings),
a one-off lump sum reflecting 19ish months of missing pension relief this month,
and then a new tax code for the 10/11 tax year which would have me re-paying the 08/09 underpayments.

Does that all make sense?

What seems to have actually happened is, this month I have changed (from BR) to 704L, overall I am receiving £2 more of net pay this month, and the payslip doesn't seem to reflect any of the other changes. Looking at the listentotaxman.com calculator using 704L code, I seem to be getting a bit less net pay than it predicts (maybe £70 less ish).

On Monday I will call the tax office again to try to understand what is happening. Does anyone else think they know why I am confused and what should be happening?
Any advice appreciated. I'm unclear as to what this current code change means in terms of paying off outstanding underpayments, or receiving credits for outstanding missing pension relief, or whether it is actually only reflecting the monthly situation going forwards (and ignoring the historical under- and overs), contrary to what they explained would happen on the phone.

I think I'm confused.

ladybirdintheuk

First of all, the "standard" tax code most people are on is 647L, which means you earn £6479 before you start paying tax. Your tax code gives you a bit more (not sure why this would be?, it might be this new tax code isn't right either! probably worth double checking to be on the safe side!) - you can earn £7049 per month before start paying tax. As you are a higher rate tax payer you should then pay 20% on some of it, and 40% on the rest.

Is your new tax code on a month 1 basis (the form they sent you will have a cross in the box if it is)? If so then it is not recalculating for this tax year, just working out your tax on a month by month basis, as I've described above. If not then it will have recalculated everything you have earnt this tax year based on your new code, so the amount you are due back, and the amount you have underpaid probably cancel each other out to some extent. That may explain why the figures don't match up with what you were expecting.

(Only problems in this tax year would get fixed through payroll... the underpayment from last tax year is what they would reclaim by putting you on a new tax code from April onwards.)

It's hard to say without the figures in front of me, which I'm sure you don't want to put up here for everyone to see!

Tax is a bit of a !!!!!! really... It's not your fault if tax isn't calculated correctly (and most people wouldn't know if it wasn't... I work in payroll, but I probably still wouldn't notice unless there was something REALLY stupid on my payslip!), but at the end of the day we are all obliged to pay it.... They don't like to make it easy for someone in your situation to sort things out though

BrunoM

Oop, tax code is in fact 764L (not 704L) - and on payslip it appears as 764L /0 - does that mean it's cumulative i.e. adjusting for the full tax year, where /1 would mean it was only considering the monthly figures?