Why your tax code is now more important than ever

Codes and the end of year review

A key feature of the PAYE system is the end-of-year review carried out by HMRC. These days it’s done automatically by its National Insurance and PAYE Service (NPS) computer. It compares the tax you paid through PAYE with what it expects to see based on the tax code HMRC thinks should have been used. If there’s a discrepancy it marks your record for manual review. Conversely, if the code matches and the PAYE tax paid corresponds with it, the NPS calls it good and moves on even if your tax code was wrongly calculated.

NPS assumptions

The NPS assumes that HMRC officers have calculated your tax code correctly despite there being countless reasons why this might not be so. To be fair, incorrect codes are often not the fault of HMRC as it calculates your code from information about your income and tax-allowable outgoings provided by you and your employer. However, it’s not uncommon for HMRC officers to interpret information incorrectly or simply make a mistake that results in the wrong tax code. The frequency of errors has increased significantly in recent years.

Trap.If the information HMRC has about your income and tax reliefs, e.g. job expenses, pension contributions, savings interest etc., is out of date your tax code is likely to be wrong. However, the NPS will not (cannot) identify this. It’s therefore up to you take the lead and notify HMRC of changes needed to your code.

Tip.If you’re in self-assessment you needn’t worry too much about tax code errors. These are superseded by your self-assessment tax calculation which will pick up any over or underpayments of PAYE tax. However, it’s sensible to notify HMRC of any significant errors in your code.

HMRC delays

Sadly, over the years HMRC has reduced its number of properly trained officers. The effect is that even if you notify HMRC that you are owed tax or that you owe it, you’ll be told that there is no need for a manual review of your tax and it will be done automatically by the NPS later in the year. This usually takes place in August and September. Frankly, this isn’t acceptable. If you’ve overpaid tax why should you wait months to obtain a refund? What’s more, as we’ve already mentioned, the NPS can’t definitively check if your code is right, consequently it will not pick up over or underpayments caused by coding errors.

Take action.The lesson here is that unless you complete a self-assessment tax return you need to pay special attention to checking your tax code and notify HMRC of any changes needed. If you don’t you might miss out on a tax refund or find yourself landed with an unexpected tax bill.