What to Do If Your Tax Code is Incorrect?

Before discussing what to do if your tax code is incorrect, you should first be aware of what a tax code is and how it is usually determined for each individual.

Each individual that is currently working, between jobs or that receives a pension has a tax code. A tax code consists of letters and numbers, for instance 117L and K497. If you multiply the three digits by ten, you’ll get the amount you are allowed to earn before paying tax. Each letter usually classifies you in a certain tax category. For instance; K is the tax code used when your total allowances are below the total amount of deductions. Other tax codes are L, P, V, Y and T.

Besides these common tax codes, there are other types of codes that are used less frequently. These tax codes usually only consist of letters and do not consist of any numbers except (D0). Primarily these tax codes are used when an individual has more than one source of income.

It should be noted that your tax code is usually worked out via your employer. When you start work, your employer usually makes a distinction and classifies you into a specific category. However, over the years, if your income changes, your job changes or your job status changes, usually your tax code should change as well. If it doesn’t or if an error occurs when an employer or government office classifies you, it can usually mean difficulties with tax reporting and ultimately you may either be sending too much taxes to HMRC or too little.
Where to Find Your Tax Code

In generally, you can review your tax code by looking at Form P45. This form is usually available from your employer. In addition, you can always contact your local tax office to review or confirm your current tax code.
What to do if Your Tax Code is Incorrect

It is imperative that your tax code is correct. Your tax code is used to calculate your taxable income and allowances. An incorrect tax code usually means that you are either paying too much tax or not enough.

For those individuals that have an incorrect tax code and have been paying too little taxes during the year, this amount must be repaid. If the tax code was incorrect due to an employer or tax office error, you should not have to pay a penalty, however immediate payment will be required. If you are unable to pay the total amount in one lump sum, you may request a repayment plan that can last from 28 days all the way up to 3 years. The repayment plan will depend upon a number of factors including the amount you owe, the circumstances surrounding the mistake along with your current financial situation.

It should be noted that in order to request a payment plan you will need to first contact HMRC. Depending on the repayment plan, you can either deal directly with HMRC (usually for payment plans of short duration - 28 days or less) or the Debt Management Service when a repayment schedule will take more than 28 days. It should also be noted that no repayment plan will be discussed until all outstanding tax returns are filed.

If you have an incorrect tax code and you have paid over and above the amount necessary, an immediate tax refund is in order.
Confirming a Tax Code

If you have doubts about your tax code being correct, you can contact your local tax office and confirm that your tax code is correct. You can usually locate your local tax office by reviewing Form P2 (this form is sent to pensioners at the beginning of the year) or asking your employer. When contacting your local tax office, you will need to supply them with certain details and information. It is best if you have a copy of Form P45. You will need to tell the tax office:

* Your tax reference number
* Your National Insurance number
* Current tax code
* Your previous earnings
* The amount of tax you have paid

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Source: http://www.hmrc.gov.uk/pensioners/whattodo.htm