Act now to defuse tax bombshell

Six million employees who are taxed under the PAYE system were told last year that they had paid either too much or too little after receiving the wrong tax code. Normal routine checks were not carried out because of a new Revenue system. When they were, big discrepancies emerged.

John Whiting, of the Institute of Taxation, said: "Before Christmas, the Revenue was concentrating on those who had paid too much tax, to get the money back to them as soon as possible. Now it is pressing ahead with demands on those who paid too little, to get that money back."

There is hope on the horizon for one group of pensioners. If they notified HMRC that they were receiving a state pension, and the authorities omitted to tax it, these retirees will not be required to repay any unpaid tax. But this only applies where the taxpayer disclosed all relevant information and HMRC failed to act.

Elsewhere, the deadline is looming for completing your self-assessment tax return which must be filed by 31 January to avoid a 100 penalty. This is also the date by which you must send a cheque to HMRC for all tax owed to date. This will include a balancing payment for the tax year ending April 2010 and a payment on account for tax owed for the first six months of the current tax year.

Many people find the prospect of sorting out their tax affairs casts a shadow over the start of the New Year. Bizarrely, 100 people filed their self-assessment forms online between 11pm and midnight on New Year's Eve.

Having to grapple with payments on account and the thought of the taxman knocking at your door can make the toughest souls tremble. In these hard times, no one wants to pay too much tax. But neither does anyone want to risk fines.

Scotland on Sunday answers your questions on how to keep your affairs in order.

Do I still have time to file my self-assessment form online?

Yes, although you must get a move on. First you must register online. After this, you will be sent a password. It is then advisable to complete the return as soon as possible, as the system can be very slow in the week before the deadline, and glitches are not unknown.

Your self-assessement will relate to your earnings for the tax year ending April 2010 and will aim to finalise your tax and earnings for that year.

If you can't cope with the internet, it is too late now to submit a paper return, as the deadline for these was October 31. However, you may escape any penalty if you still submit a paper form, provided you pay all tax due at the same time.

Do many people file on line?

Online filing has grown over the past decade from 39,000 to 6.5 million.

What happens if I do not send in my self-assessment form?

If your form arrives after 31 January you are automatically fined 100. There will be further penalties and interest for the late payment of tax due.

Where do I begin?

Collect all the papers you need. If you are employed this will include a P60 detailing your earnings for the last complete tax year, plus a P11D outlining the benefits you have received, such as company car and medical insurance.

On top of this you will need bank interest statements, dividend foils, gift aid records and personal pension statements.

Only when you have all this information should you begin the return.

What about the self-employed?

These individuals need to draw up a set of accounts showing turnover for a 12-month period, and then deduct all expenses. Submit totals on the form.

You are required to be able to justify the expenses if the tax inspector asks to see evidence of them, which means keeping receipts for five years. In theory you can be fined 3,000 for each missing receipt.

Don't be greedy and only claim expenses which are genuinely vital to your business. HMRC sees the returns of your competitors and colleagues and knows what kind of expenses you face in your line of work.

Must I include tax-free investments?

Investments held in Isas, whether savings in a bank or building society or share dividends do not have to be entered on your form. Neither do tax-free National Savings, such as savings certificates, although the taxable ones such as income bonds must be included.

Must I include my pensions?

Payments into a company pension are not required to be included, but other pension contributions must be. However, all forms of pension payment, whether from a company, private annuity or the state must be included as these are taxable.

Do I have to list all items separately?

Always add up totals rather than listing, for example, every bank account, or share dividend. Do the sums with care, and check your arithmetic.

Once I've filled in my form is that it?

Far from it. You have to make payments.

What kind of payments?

You must look at how much you have already paid in respect of the last tax year, and if you owe more, you must adjust and make a balancing payment. But then you must also make a payment on account for this tax year based on half your earnings for 2009/2010. If you fail to make either of these payments, you will be fined and subject to penalty and interest charges.

What if your earnings have dropped so your tax bill for this year will be lower than last?

You can appeal to make a lower payment on account, based on falling earnings.

I find it too difficult to know how much tax is due

Once you have filed your return, call the helpline and the operators will tell you how much tax is due. But don't leave it until the last minute because it will become harder to get through.

Anything else?

Check the form thoroughly. Print the return out. Check for sense and plausibility. Do the figures look right? Does it all add up? Does anything look odd or out of line?