Confused Scots facing income tax bill shock

SCOTS risk paying the wrong amount of tax because they have no idea how much they are due, new research has revealed - as thousands of taxpayers are hit with extra bills due to a mix-up by the Treasury.

• Those failing to keep tabs on their taxes could face a large bill as a result of making the wrong payments. Picture: Getty

Almost one in two people north of the Border don't know their tax code, with low awareness of what income is taxed and at what rate, a report by HSBC has shown.

It was revealed earlier this week that 1.4 million people have to repay an average of 1,380 after paying too little tax, while another 4.3 million taxpayers are in line for refunds averaging 419 after paying too much through PAYE, where income tax is deducted straight from wages.

Now Scotland's leading tax experts have warned that the crisis has added to the already widespread confusion about how much tax we pay.

David Payne, tax partner at Baker Tilly Glasgow, said most of the 1.4 million people receiving tax repayment demands will have no idea how or why they have been hit with the extra bills.

"Most will have reasonably assumed that, because all their income was received after deductions of income tax and National Insurance via the PAYE system, HMRC already had all the information necessary to get their tax right," said Mr Payne.

The incorrect payments were highlighted after a merger of the National Insurance and PAYE system shone new light on discrepancies in HMRC's records that caused incorrect codes to be issued.

But the HSBC research suggests few Scots would know if they were given the wrong tax code.

It found that 49 per cent did not know their income tax code and more than a third had never checked their P60, the end-of-tax-year statement.

It also uncovered low awareness of personal income tax allowances and the current thresholds for different tax bands. Eight in ten Scots did not know at what level of earnings 40 per cent tax takes effect (37,401) and almost half over-estimated the amount they had to earn before hitting the 40 per cent rate. Almost six in ten did not know the personal income tax-free allowance, 6,475.

The confusion extends to the type of income that is taxed, with 75 per cent unaware that income tax was payable on employee benefits and almost a third surprised to learn that it is also payable on pension income.

David Wells, HSBC's head of pensions, savings and investments, said the widely publicised HMRC errors had reinforced the importance of individuals knowing their tax codes.

"Wherever you live in the UK, there is always a chance you have been overpaying, in which case you can reclaim the tax. There is equally the possibility that you could be underpaying and could be faced with a large tax bill," said Mr Wells.

But Scottish tax experts claim the blame also lies with a tax system that puts too much onus on individuals. Robert Black, tax manager at Anderson Strathern in Edinburgh, said: "The man in the street won't necessarily know what his tax code means, but the responsibility is with him to tell HMRC of any changes in circumstances, and if he doesn't it will tax accordingly.

"If you don't tell HMRC about a company car or income from letting a property, for instance, it can come back on you."

The problems have been exacerbated by a staffing crisis at HMRC, the Public and Commercial Services (PCS) union said yesterday. It claimed the errors this week were linked to the 2005 merger of Revenue and Customs and the resulting job cuts, and said it warned the Treasury three years ago of potential problems.

Ronnie Ludwig, partner at Saffery Champness in Edinburgh, pinned the blame on HMRC's computer systems. "The system for keeping PAYE tax code numbers up to date is not really fit for purpose, so any changes during the course of the tax year may not be picked up until well after the event," he said.

It has also emerged that a separate error means thousands of high-earners face demands for unpaid tax. When a new higher income tax rate of 50 per cent was introduced in April for those earning over 150,000, the tax office failed to issue some of those affected by the hike with new PAYE codes.

Both HMRC and the Treasury have sought to dampen hopes of the amounts owed being written off. HMRC yesterday added a note to its website reiterating that it would write off underpayments only in certain circumstances.