The PAYE tax system is now working as it should...

I was invited to appear on BBC 3 Counties radio twice yesterday to explain some of the facts behind the big PAYE tax news story. Sadly I could not get phone reception at either of the appropriate times but here are extracts from the notes I made in preparation for the interviews. I would never have been able to cover all of these points of course:

• No - this is not a deliberate attempt by HMRC to sting taxpayers as part of a 'let's collect as much money as we can' approach [A suggestion put to me by the researcher who had called]. More people are due refunds than appear to owe money to the taxman anyway.

• The new PAYE computer system has brought these errors to light. There have always been unders and overs as the PAYE system isn't perfect. This year we know about them all and the new system makes it more likely they will be resolved faster than in previous years. So in some ways its a good news story. HMRC changing their systems to try to get things less wrong than in the past!
  

• References to a figure of 10m people due tax rebates are wrong. HMRC have said 4.3m have overpaid in the last 2 years and 5.8m in earlier years. This is likely to be many of the same people.
  

• The PAYE tax system has been creaking for years. Not designed for people who change job more than once a year or who have more than one part time job at a time.

• Many of the people who owe money do so because they have a company car that was not properly taken into account in their tax code. And they probably know this and hoped they would get away with it.
  

• References to employers using the wrong tax code for an employee are a touch unfair. Employers use the tax codes issued by the taxman. If it's wrong it's because the taxman didn't have or didn't use the right information. Often the taxpayer hasn't told the taxman everything they need to know.

• Tax Codes are not something that the taxman and employers can work out between themselves. The taxman tells the employer what to do based on information given to them by the worker.
  

• PAYE is a simple idea - Pay as you Earn. It's a way of paying tax by instalments but it can only get to the right figure every year if your affairs are very straightforward. In most cases there will be unders and overs that get sorted out by an adjustment to your tax code the following year. This happens to millions of people every year. It always has done and always will do.
  

• To get everyone's tax spot on each year we would all have to file annual tax returns. In fact most people on PAYE don't do this. They can if they want to though....

• The previous Government added layers of complexity to the tax rules and calculations which the PAYE system was not capable of easily dealing with. (Tax codes can only charge 40% and not 50% tax if someone liable to the top rate has a second job, so they will always underpay tax through PAYE on that second job)

• Where you owe less than £2,000 any unpaid tax will normally be collected by adjusting your tax code for next year. So again, it's good news. If you do owe tax, instead of being asked to pay it back straight away you'll be given loads of time and the repayments will be spread over 12 months.

• Only a small proportion of the 1.4m PAYE taxpayers who owe money will be able to use what is being misleadingly called a 'loophole' to avoid repayment of any tax they have underpaid. It's a concession and not a statutory right. ESC A19 only authorises HMRC to write off the debt if the taxpayer can prove they have provided all relevant info and HMRC has evidently not used it AND taxpayer could reasonably have expected their tax deductions to be right.
  

• The taxman may well ask for a full tax return for the year before agreeing to write off a tax debt. Do you have any undeclared casual earnings, investment income or rental income?

• If your affairs are complicated or you have any undeclared sources of income, do take professional advice from a specialist tax adviser before contacting the tax man.

• You may also want to speak to a tax specialist if you are willing to pay for one-off advice rather than an accountant to help you every year.

Postscript: In the event I went on the show this morning and in 4 minutes of airtime I think I made 4 or 5 of the above points!