Tax Overcharged on P800 Calculations

Many taxpayers have overpaid income tax under the P800 system due to a flaw in HMRC's calculation method.

As part of its annual PAYE reconciliation process at the end of each tax year, HMRC compares the amount of tax deducted from wages and pensions with the amount that was actually due. Any under- or overpayment of tax is notified to the taxpayer using a tax calculation letter known as form P800.

You or your employees might owe tax or be owed a refund because you:

• were put on the wrong tax code, for example because HMRC had the wrong information about your income;

• finished one job, started a new one and were paid by both in the same month;

• started receiving a pension at work; or

• received employment and support allowance or jobseeker’s allowance.

Where taxpayers have a mixture of non-savings income, savings income and dividends, the calculation should, according to legislation, apply the personal allowances and reliefs in the way that produces the lowest overall tax bill. This process is called 'beneficial ordering'. It has come to light that beneficial ordering is not applied for P800 calculations, resulting in some taxpayers paying too much tax.

HMRC is aware of the issue and a manual checking process is underway. Where it discovers discrepancies, these will be reconciled at the year-end and the taxpayer will be refunded if appropriate. In the meantime, if you or your employees receive a P800 it is important that we review the figures in line with the self-assessment calculation method. If they differ, the P800 should be challenged with HMRC and any overpaid tax reclaimed. We can help you with this.