HMRC embarks on tax reconciliation process

As many as 4.7 million people may have paid incorrect amounts of tax for the year 2010/11, HM Revenue and Customs (HMRC) has said.

The figure has emerged as a result of the reconciliation process that the tax authorities conduct each year.

This involves cross-checking details on the PAYE system, ensuring that the amounts of income tax and national insurance contributions deducted by employers tally with the information contained on HMRC's database.

While most of the 40 million people on the PAYE database will have paid the correct amount of tax, some, through changes in circumstances such as moving to new jobs, retirement or taking on additional sources of income, will either have over- or underpaid their taxes.

HMRC has estimated that between 1.7 million and 3.5 million taxpayers have paid too much and will be entitled to refunds averaging £340 each.

However, some 1.2 million might have paid too little and will be asked to make good the shortfall at an average of between £500 and £600 each.

Last year, when the PAYE system underwent a radical overhaul and information contained on several different databases was merged into a single set of records, serious criticism was levelled at the tax authorities for the management of the relevant information.

Many millions of discrepancies emerged as a result of the re-alignment of the systems, covering the tax years 2008/09 and 2009/10.

Some 1.4 million people were obliged to repay an additional £1,420 each in order to clear their debts.

This year, though, HMRC has claimed that they "are in a happier place" than 12 months ago, with the new system "working very well".

HMRC said that the range of 1.7 million and 3.5 million who have overpaid their taxes is an estimate. If it is accurate, then £1.2 billion will need to be refunded by HMRC and £720 million recouped.

A spokesman said: "We won't know the exact figure until we have crunched the numbers, which will start from mid-July."

Those who are entitled to a refund should begin receiving cheques during August and September

The attention of HMRC will then switch to underpayments, with the final notifications (form P800) detailing the new tax calculations going out by the end of December.

Most of those who have paid too little tax will not be sent a bill. Instead their tax codes will be adjusted for the year 2012/13, the money automatically deducted from their salaries.

Given the scale of the repayments last year, HMRC agreed to write down amounts owed below £300. That concession has now been dropped, and HMRC will seek to recover all debts above £50.

Taxpayers who consider the new HMRC calculations to be wrong will have the opportunity to appeal against the bills.

Up to £3,000 per individual in underpayments can now be collected through the PAYE system, an increase on the £2,000 previous limit.

People will be able to pay by cheque if they so choose, although HMRC insisted that they are not expecting deficits higher than £3,000.