The Pitfalls of PAYE

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PAYE (Pay-as-you-earn) by HMRC is one which runs parallel to the perhaps better known Self Assessment system. Taxpayers will find themselves falling into one or both of these, depending on circumstances.

The Self Assessment system includes a final reckoning for the taxpayer each year, effectively overruling the PAYE position, giving comfort that taxes are correct. However, those purely within PAYE rarely have the same level of confidence that their taxes are always right and despite a fairly recent overhaul by HMRC to the system, many are still paying the wrong amount of tax. Nobody is quite sure how many people’s PAYE position is incorrect each year however estimates have been as high as 5.5 million UK taxpayers.

For most people the PAYE system does an adequate job of deducting the right amount of tax. But it certainly doesn’t get it right all the time. There are certain types of taxpayer most likely to fall foul of dubious PAYE codes and who should be particularly wary.

  • The recently retired
  • Those changing, starting, or ceasing employment
  • Those with more than one source of PAYE income (such as a job and pension)
  • Those with benefits-in-kind

Every taxpayer always has the option of filing a Self Assessment return so they know their tax has been correctly assessed, but aside from that what can be done?

Two things. The first is to keep on top of the PAYE codes issued to you by HMRC in-year. If the code is correct, and accurately reflects your taxable income sources and reliefs for the full tax year, then the amount of tax deducted should be correct.

As well as including your amount of tax free allowance for the year, a PAYE code might also include various adjustments to reflect your other circumstances, taxable benefits or state pension income being two of the most commonly seen. Each adjustment in your PAYE code should relate to a figure relevant to you for that tax year, otherwise it may need checking with HMRC.

The second thing you can do is check retrospectively. Once a tax year is complete, its possible to compare the amount of tax you’ve actually paid through PAYE against the amount you should have paid based on your total taxable income. If there is a discrepancy its time to contact HMRC and let them know. Just because the tax year has completed doesn’t mean your tax position is necessarily final; it’s possible to reclaim overpaid tax from HMRC as late as four years after the tax year ends.

Garbutt + Elliott’s private clients tax team can assist with all matters relating to PAYE and Self Assessment.

If you’re concerned you may have paid too much tax, or would like more information, please get in touch with James May.