Tax matters: Don't count on a concession from the taxman to avoid paying up

It should not come entirely as a surprise that many people end up with under or overpayments of tax

YOU should by now have received the annual confusing deluge of coding notices from HM Revenue & Customs (HMRC).

Some people may have received letters with the good news that a tax refund is due, but sadly others will have the bad news that they have underpaid tax, in some cases, substantially.

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Those unfortunate enough to fall into the latter category may have heard that they may be able to use an HMRC extra statutory concession number A19 to avoid paying the tax. In the majority of cases, however, this will offer little hope.

The concession will only assist where HMRC has been provided with full information about your income or circumstances, but have failed to act on it within a "reasonable time" (determined as 12 months from the end of the tax year in which it received the information). While there maybe a number of cases where the concession is applicable and HMRC may then agree to write off the arrears, for the majority that is unlikely to be the case.

It must be remembered also that it is a concession granted only at the discretion of HMRC.

So what has gone wrong? When you consider the way the pay-as-you-earn (PAYE) system operates, it should not come entirely as a surprise that many people end up with under or overpayments of tax.

Income tax is collected from wages and salaries on the basis of a PAYE code number, which is and that code number is composed from a large number of variables - personal allowances and deductions on the one side and taxable amounts, such as benefits in kind or new sources of income, such as pensions, on the other.

For the correct amount of income tax to be deducted at source, the PAYE code must reflect the correct value of all of those variables. Not impossible, but in many cases a tall order.

Take someone who has had a low interest loan from their employer in the tax year which has just ended, for example. The loan balance may have moved up and down over the course of that year as repayments were made or further loans were advanced.

The actual taxable benefit for the year is unlikely to be known until after the end of the year and it would be highly unlikely that the 2010-11 PAYE code would have reflected the benefit accurately.

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Similar problems can happen where an employee has changed company car during the c tax year, or moved from being on a salary to drawing on a pension.

If you have already sent in a tax return for 2010-11, then any under or overpayment of tax will have been, or should have been, picked up and resolved through that process.However, the latest date by which the 2010-11 tax return must be lodged is 31 January, 2012 - far too late to prevent the build-up of an underpayment.

If you have not been sent a tax return to complete - which is the case with the majority of those of us whose affairs are relatively straightforward - you may be one of the recipients of the HMRC letters. If that letter shows an underpayment, then it is very unlikely that the concession will be applicable.

In the example above, HMRC would be informed of the correct benefit figure in the tax year ending on 5 April, 2012, by the employer, when it declares the benefit on the form P11D. That means HMRC would still be within the12-month time limit, which runs to 5 April, 2013, for seeking payment of the arrears.

Estimates are part and parcel of the PAYE system and perhaps we should not be too surprised when the result of using those estimates produces an inaccurate tax deduction.

But individuals have responsibility for those estimates too and, as many have discovered to their cost, PAYE code numbers are very important. If we spend a bit of time checking our PAYE codes and lodge our tax returns sooner rather than later, we should avoid unwelcome letters from HMRC in future.

• Ronnie Ludwig is a partner in the private wealth group at Saffery Champnes