Thousands of workers and pensioners were unknowingly taxed above their actual liabilities last year. The issue stems largely from mistakes in payroll data, growing complexity in the tax code system, and the use of incorrect or incomplete taxpayer information by HMRC.
Taxpayers rely on the accuracy of their tax code to ensure they are paying the correct amount of income tax via Pay As You Earn (PAYE). These codes are generated by HMRC and used by employers and pension providers to calculate deductions from earnings. However, when those codes are incorrect, it can result in significant overpayments which are not automatically refunded.
According to data obtained by accountancy firm UHY Hacker Young through a Freedom of Information request, 5.6 million people were affected in the 2023–24 tax year alone. These errors have been attributed to a combination of administrative issues and systemic misjudgements within HMRC processes.
Inaccurate Data and Coding Issues Drive Widespread Overpayment
Many of the overcharges can be traced to HMRC operating with incomplete or outdated information about taxpayers’ personal circumstances. According to UHY Hacker Young, in some cases the system incorrectly assumes that individuals continue to receive company benefits such as cars, private medical insurance, or gym memberships that have already ended.
Mistakes also arise when HMRC presumes secondary income streams (such as rental income, dividends or freelance work) are still active. If an individual’s employer submits payroll information late or inaccurately, the likelihood of coding errors increases further.
Neela Chauhan, a partner at UHY Hacker Young, said that millions are being taxed incorrectly because HMRC is “almost guessing what they earn” and most people won’t notice the discrepancies. “HMRC won’t always correct overcharging mistakes automatically and if you don’t check your tax code or your PAYE calculation you may never get your money back,” she warned.
The tax authority itself has stated it does not have a legal duty to inform individuals of overpayments made through PAYE. This places the burden on individuals to identify and report errors, a task that many find challenging given the often opaque nature of tax codes.
Complex Tax Codes Leave Taxpayers in the Dark
For many people, understanding and verifying their own tax codes is a daunting task. Emma Rawson, director of public policy at the Association of Taxation Technicians, said the growing complexity of the tax system has resulted in more deductions being coded out than ever before. According to Rawson, “The tax system overall has become more complicated,” and many people see their tax code as little more than “a random string of letters”.
Tim Stovold, head of tax at Moore Kingston Smith, echoed this view, stating that ordinary taxpayers “will quickly be baffled by the numbers and alphabet soup of letters that determine how much tax-free allowance is given”. He also noted that getting assistance from HMRC is far from straightforward, with millions of calls going unanswered every year.
According to HMRC, it is investing £500 million into digital services to improve taxpayer support and help people pay the correct amount of tax from the outset. Yet concerns remain over whether this investment will adequately address the systemic flaws that led to billions being overpaid last year.
