Falling foul of the taxman can be an expensive business. "I had a client who was filing his tax return online," says Sharon Nash, chief executive of tax specialist Simpson Burgess Nash. "For the previous two years he'd completed all the boxes and got a nice little payout.
"But it turned out he was putting his pension contributions in the wrong box. It was picked up by HM Revenue and Customs and he had to pay it all back, plus interest, surcharges and penalties."
While it's bad enough paying a penalty if you've made a mistake, it's even more galling to lose out because HMRC gets it wrong. Last year, around 600,000 taxpayers were overcharged a total of £213 million.
One of the most common mistakes that HMRC makes is giving out the wrong tax code. Last year, the National Audit Office found that one in five people had an incorrect code. This could mean you're not getting the allowances you're entitled to, or are being taxed at a higher rate. An HMRC spokesman conceded that it's always best to check whether you have the right code or not yourself.
You will have received a coding notice when it was last changed but, if you don't have the letter, you can still investigate your code. It will be on your latest payslip, and will feature a number and a letter.
The letter can signify a variety of things: L means you get the basic personal allowance; P means you're aged 65-74 and get the full personal allowance; V means you are 65 to 74, eligible for the full personal allowance and the married couple's allowance and pay basic rate tax; T is the emergency tax code, when HMRC doesn't have enough information to code you properly; and K means you get no tax-free pay or you owe HMRC money.
The code will also have a number. Multiply this by 10 and it's your tax-free allowance. The basic allowance this year is £6,035, so the tax code number will be 603. If it's lower than this, it may be because you receive a taxable benefit from your employer, like a company car or health insurance. If it's higher, it means you have an additional allowance, such as the married couple's or an age-related allowance.
Common mistakes with coding include the fact that many people don't realise they have to tell HMRC they're getting older - you actually need to contact HMRC to point out the obvious or you may not receive your allowances.
Marie Parish, a 69-year-old retiree from the Midlands, had her code checked by her son-in-law, who discovered she hadn't been receiving her full personal allowance for four years. She says: "I got a payout of hundreds of pounds, which came in very handy."
There are other frequent errors. For example, if you had a company car that you no longer use, HMRC may be siphoning off too much tax. Alternatively, if more than one tax office is dealing with your affairs - for example, if you have more than one job - there's a good chance they're not communicating with each other, so you might be taxed twice, or not at all.
Other problems occur when HMRC makes a mess of your tax return - for example, when someone types a wrong number into the computer. HMRC says this happens in about 3% of cases. Nash says: "The problem is that you just get a bill, not a calculation, so it's hard to see where the figures have come from."
Francesca Lagerberg, head of the National Tax Office at Grant Thornton, adds: "You should know what you're expecting; if it's different, act on it. Don't assume it's right."
Family care payments
Another area where HMRC comes unstuck is if you're using a relatively unknown rule. Nash says: "If you have family care payments, for example, where one member of the family is looking after another, they are tax-free. But, from time to time, the Revenue has said to a client of ours that they should be paying tax and
national insurance on it. We've had some very substantial payouts of tens of thousands of pounds due to this."
If you think HMRC has made an error, give them a call or take your paperwork down to your local enquiry centre. However, Nash warns: "If your circumstances are complex, don't rely on front-line staff - they can't know everything." And if you get no joy, don't give up. "If you think you're right, be persistent. You have to argue your case quite forcefully to be heard," she adds. You could hire a professional to do this for you.
Finally, if you feel as though you are banging your head against a brick wall, you can take your complaint up with the adjudicator via its website or by calling 0300 057 1111. If they agree there were mistakes, they'll instruct HMRC to apologise, and possibly compensate you.
But, whatever you do, act quickly. At the moment, taxpayers can reclaim overpaid tax for five years and 10 months after the end of the year to which the claim relates. From April 2010, however, the time limit will fall to four years.
Of course, there's always the chance that you'll discover that you owe HMRC money. But it's far better to know, than to wait for years of debts, interests and penalties to hit you further down the line.
