Contractors warned over HMRC charging £3.5 billion too much

The taxman making false assumptions about "dividends or freelance work" is one of the key contributors to him overcharging taxpayers — by a hefty £3.5billion.

Accountants UHY Hacker Young uncovered the swingeing figure – applicable to income tax last year — which is based on 5.6million Brits paying HMRC more than they owed.

Last night, contractor taxation experts told ContractorUK of their shock at the £3.5bn overpayment, which averages £625 too much per taxpayer going to HMRC.

'Contractors should check they're not among the HMRC overpayers'

Dolan Accountancy says it's "staggering," and "at a time when every penny counts," urged contractors to 'check you're not one of the HMRC over-payers.'

DNS Accountants called £3.5bn "astonishing," but warned "it's true that contractors" are at greater risk due to the "complex nature of their income streams."

Carolyn Walsh, a former tax officer, says HMRC isn't required to flag up overpayments because it expects everyone to correct any errors via their Personal Tax Account.

'Incorrect tax codes, partly due to dividend or freelance work assumptions'

Even the income tax disclosure of charging £3.5bn that it wasn't due didn't come from HMRC coming forward.

Instead, UHY Hacker Young had to prise the figure out of officialdom by using freedom of information rules.

"This overcharging through the PAYE system largely stems from HMRC issuing incorrect tax codes," UHY Hacker Young said in a statement.

"HMRC issues the incorrect tax codes due to…[four reasons, including] incorrect assumptions about an employee's additional income, such as rental income, dividends or freelance work that they are no longer doing."

'Common causes of overpaying'

According to Chart Accountancy, "common" causes of overpaying tax include outdated codes, delayed payroll updates, multiple jobs, and unrecorded changes in income/benefits.

"Missing pension contributions that are not reflected in the tax code also result in workers paying more tax at source than they should," Justin Go, personal tax accountant at Chart Accountancy, told ContractorUK.

"The problem is worse for higher earners who no longer have to file Self-Assessment.

"Many rely solely on HMRC's automated Simple Assessment to reconcile tax, which may be delayed, contain errors, and give only a limited time to respond. Missed corrections can lead to HMRC demanding payment or automatically coding it into the next year."

'Regularly checking your PAYE record and tax code is essential'

Chart's Mr Go continued: "And even lower earners can be affected if small benefits, incorrect pension deductions, or other employment changes are misapplied.

"[Regardless of taxpayer-type, HMRC] leaves the responsibility on taxpayers to monitor their codes. Therefore, regularly checking your PAYE record and tax code is essential to reclaim money lost to HMRC errors."

Previously an inspector of taxes, Walsh says contractors should treat her old boss's Personal Tax Account (PTA) tool in the same way that most now regard online banking.

'Use your PTA to control how much tax HMRC takes off you'

Walsh told ContractorUK: "Like e-banking, there's so much that you can do with the PTA. Controlling how much tax HMRC takes off you should be uppermost in every taxpayer's mind.

"But what good is a tool if, first, you don't know how to wield it. And second, it's effectively locked away in a cupboard, and you have to remember the ID and password to get into it!?

"Here's an example. A friend said he had a 'reduced tax code' and didn't know why. So we looked at his Personal Tax Account, and staring at us was £38,000 of 'Uncoded Income.' That's 'income from another source,' such as a pension drawdown, company loan, company benefit, or rental income. But he didn't have any of those. So we clicked 'update' and simply removed the uncoded income. And hey presto — his tax code returned to standard immediately!"

'Multiple contracts can lead to tax calculation discrepancies'

Managing director of DNS Accountants, Sumit Agarwal, says it's right that contractors in particular take note of the taxman taking £3.5bn too much.

He told ContractorUK: "Contractors are particularly vulnerable to such overcharges due to the complex nature of their income streams.

"They often juggle multiple contracts, and the intricacies of that can sometimes lead to discrepancies in their tax calculations. This is precisely why contractors heavily rely on their accountants and HMRC to ensure the accuracy of their tax bills.

"But unfortunately, I'm extremely confident that HMRC is overcharging many and not making auto-adjustments. Until queried, taxpayers have no clue about the excess tax paid and so won't be refunded".

'Keeping HMRC informed'

Lauren Monks, a director at Dolan Accountancy, said: "Contractors can find themselves busier than ever, so keeping HMRC informed might slip down the priority list.

"But HMRC's latest admission — overcharging by £3.5bn— is something to pay attention to.

"Contractors must stay on top of their finances, including letting HMRC know if their circumstances change. Doing so will pay off — quite literally."

'HMRC is in no mind to chivvy you on'

The boss of Oblako Ltd, ex-tax official Carolyn Walsh echoed: "HMRC has given taxpayers access to all their data, but it has left it entirely up to them to use it to ensure they don't pay too much tax.

"So if contractors don't use what's been made available, HMRC is in no mind to chivvy you on. Indeed, why would they when they're sitting on billions of overpaid tax?"