What to do if you receive an unexpected tax bill

Tax form More than a million people are being asked to pay more tax for the 2010-11 tax year

Unfortunately, far too few people check their taxes and later they discover problems.

For an estimated 1.2 million people paying tax through Pay As You Earn (PAYE), those problems are now being revealed in the form of tax bills for the 2010-11 tax year.

These are unwelcome at any time, but particularly in the expensive winter months.

The problem is that unless you fill in self-assessment tax returns, HM Revenue & Customs (HMRC) might not have all the information it needs to get your tax right.

It may have information about your wages or pensions from you, your employer or pension provider.

Or the Department for Work and Pensions may have told HMRC about your state pension.

But, like a jumble sale jigsaw puzzle, when HMRC puts it all together, there might well be one or more pieces missing.

Also, mistakes can happen and HMRC will usually expect you to have spotted them by checking your notices of PAYE coding or your P60 forms and payslips.

HMRC is now reviewing individuals' PAYE records for the tax year to 5 April 2011.

From computer data, HMRC will work out whether it thinks you have:

  • paid the right tax - in which case, you will hear nothing.
  • paid too much, and are due a refund.
  • or not paid enough - in which case, if you owe £50 or more, you will get a bill.

Most of the refunds were paid out during the summer, then bills started going out in early November.

Check your bill

Importantly, HMRC's tax calculation, contained in the P800 form you have just been sent, is an estimate and it is based on the computer data it has about you.

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Check if you have got all your tax allowances”

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HMRC will send notes with the calculation to help you check it, but there are several things of which you need to be sure.

The first is to ask yourself where the figures came from.

If several jobs or pensions have been added together, more than one source could be lumped into a single amount of PAYE income.

Compare the figures on your P800 to other information in your possession, such as your P60, P45, P11D forms, and bank and building society statements.

You should also ask yourself what could be missing.

Kelly Sizer If the tax bill has been calculated accurately you will probably have to pay it, says Kelly Sizer

Have you told the Revenue about payments which can reduce your tax liability, such as pension contributions or gift aid donations?

You should also claim all allowable expenses against your wages.

Some common expenses payments allowable against tax are mileage allowances for using your own vehicle for business travel (if they have not been fully reimbursed by your employer) and uniform or work clothes allowances for certain trades.

Finally, check if you have got all your tax allowances.

Some allowances are commonly missed, such as blind person's allowance (which you do not have to be completely blind to claim).

Higher personal allowances could also be due if you celebrated your 65th or 75th birthday in the tax year.

Contacting HMRC

If you discovered a problem with the calculation or do not understand it, you can contact HMRC's helpline on 0845 3000 627.

The textphone for those with hearing or speech impairment is 0845 302 1408.

If you do call, be ready with the calculation as HMRC will ask for your national insurance number (NINO) and will also ask security questions before discussing it with you.

Keep a note of the call, including the date and time, the name of the person who you spoke to, and what was said on both sides.

If you write to HMRC, give your NINO, PAYE reference, full name and address, and explain your question or claim.

Sign and date the letter, keep a copy of it and any enclosures and get proof of postage.

In many cases the tax will be correctly calculated and legally due - so unfortunately yes, you will have to pay.

But you do have some rights.

Payment errors

If your employer or pension provider has made a mistake, HMRC is legally obliged to investigate whether in fact they should pay the tax owed as a result.

Or if HMRC has made mistakes, you can invoke what is called Extra-Statutory Concession A19 (ESC A19).

This is a published policy under which HMRC may write off arrears of tax.

But that can only come about if HMRC failed to make "proper and timely use" of information in its possession, and it was reasonable for you to think that your tax affairs were in order.

This usually only applies for tax years ending more than 12 months ago.

For example, you cannot normally use ESC A19 to ask for tax owing for 2010-11 to be written off if HMRC advises you of the underpayment in, say, November 2011.

However, if HMRC have persistently got something wrong year after year, they do have the discretion to write the tax off for all years up to and including 2010-11.

So if you underpaid tax in earlier tax years, and an underpayment in 2010-11 occurred for the same reasons, ECS A19 might apply depending upon your individual circumstances.

How long to pay?

HMRC will try to collect the tax via your PAYE code over a year, from April 2012.

But if you owe £3,000 or more, or if you do not have enough wages or pension against which to deduct the tax, HMRC will contact you about paying directly.

Although you can pay immediately in full, HMRC should agree to you paying by instalments over a year, so ask if you need longer.

Pensioners whose state pension was not taxed correctly in the past should automatically be offered three years to pay.

Effect on benefits

Finally, it is worth bearing in mind that how much tax you pay can affect entitlement to means-tested benefits.

Generally speaking, the more tax you pay, the lower your net income, so the more means-tested benefits you should be able to claim.

If you think this might affect you, contact your benefits provider.

Note, however, that a tax bill does not affect your tax credits claim.

Further guidance, including example letters to help you write to the Revenue, can be found on the Low Incomes Tax Reform Group's website.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.

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