Around 5.6 million UK taxpayers overpaid £3.5bn in the 2023-24 financial year due to PAYE tax code errors – check if you’re owed money back
Brit workers may have paid too much to HMRC, an expert has warned. Now people are being urged to make checks to see if they have been overpaying.About 5.6 million British taxpayers are thought to have paid excessive income tax throughout the 2023-24 financial year due to mistakes in their PAYE tax codes. This represents one of the most widespread issues facing workers and freelancers, with many oblivious to the problem as the additional tax is deducted automatically from their pay packets.
HMRC uses tax codes to calculate the amount of income tax that should be withdrawn from someone’s earnings. However, when HMRC’s records are inaccurate or outdated, employees can find themselves paying either too much – or insufficient – tax monthly.
Typical causes of mistakes include switching employers, holding multiple income sources, or receiving employment perks like a company vehicle or private medical insurance. Lee Murphy, managing director of The Accountancy Partnership, noted that people often presume their tax is accurate purely because it’s removed automatically, reports the Daily Record.
He explained: “Tax codes are based on the information HMRC has about your circumstances. If that information is wrong or hasn’t been updated, you could be overpaying tax without realising it.”
Since the system operates via payroll, mistakes can remain undetected for extended periods – meaning even minor discrepancies can accumulate substantially over time.
Employees are now being encouraged to spare a few moments checking their tax code, especially if their personal situation has altered during the previous year. Mr Murphy continued: “It’s something you’re going to want to sort out straight away so you’re not out of pocket. Checking your tax code only takes a few minutes and could save you money.”
HMRC generally updates tax codes using information supplied by employers or taxpayers, but delays or errors in that data can result in incorrect deductions.
Verifying your tax code
The simplest method is to examine your payslip. Once you’ve noted your Personal Allowance tax code, you can visit the GOV.UK website and access the online “Check your Income Tax for the current year” service. This facility, which applies to the current tax year, enables you to verify your tax code and Personal Allowance, and to identify whether a tax code has been altered.
Additional features available through this online platform include providing users with an estimate of their total tax liability across the entire tax year. That said, the service isn’t accessible to self-employed individuals.
The GOV.UK website states: “You cannot use this service if Self Assessment is the only way you pay Income Tax.”
Understanding tax code numbers
The figures in an employee’s tax code indicate how much tax-free income they receive in that tax year, known as your Personal Allowance. You typically multiply the number in the tax code by 10 to calculate the total amount of income they can earn before taxation applies.
For instance, an employee with the tax code 1257L can earn up to £12,570 before they are subject to taxation. If their annual income is £30,000, the taxable amount is £17,430 (£30,000 – £12,570).
What the tax code letters mean
The letters in an employee’s tax code correspond to their circumstances and how these impact their Personal Allowance. A comprehensive list of tax code letters and their meanings can be found on the GOV.UK website here.
Most frequently used letters:
- L – Indicates an employee who is entitled to the standard tax-free Personal Allowance
- S – Denotes an employee whose primary residence is in Scotland
- BR/ SBR – Used for a secondary job or pension
- M – Applies to an employee whose spouse or civil partner has transferred some of their Personal Allowance
- N – Refers to an employee who has transferred some of their Personal Allowance to their spouse or civil partner
- T – Used when HMRC needs to review certain items with the employee
If your tax code ends with ‘W1’, ‘M1’ or ‘X’
W1 (week 1) and M1 (month 1) are emergency tax codes and appear at the end of an employee’s tax code, such as ‘577L W1’, ‘577L M1’ or ‘577L X’.
If your tax code starts with a ‘K’
Tax codes beginning with ‘K’ indicate that you have income not taxed elsewhere and it exceeds your tax-free allowance.
This typically occurs when you’re:
- paying tax you owe from a previous year through your wages or pension
- getting benefits you need to pay tax on – these can be state benefits or company benefits
Your employer or pension provider deducts the tax due on the untaxed income from your wages or pension – even if another organisation is paying the untaxed income to you.
