Hundreds of thousands of people receiving company and personal pensions risk being overtaxed due to being given the wrong tax code and so should check it as a matter of urgency, Royal London has warned.
The group, which has published a new guide, Decoding your tax code, estimates some 800,000 people under state pension age are receiving pensions but should be non-taxpayers because their total income is below the personal allowance (£11,500 in 2017/18).
Royal London policy director Steve Webb (pictured), the guide’s author, said this could be a particular issue for those who have multiple sources of taxable income, such as a wage and a pension or multiple pensions.
Around 30 million people in the UK pay income tax but only around 10 million of these fill in a tax return, according to Royal London. For the rest, the pay-as-you-earn system, built around the use of tax codes, is designed to collect the right amount of tax over the course of the year.
“If the tax codes are incorrect, the wrong amount of tax will be collected,” said Webb. “Where errors have been made, these can sometimes go uncorrected year-after-year, and individuals may be able to claim refunds for more than one year.”
Webb, a former pensions minister, suggested the mistake could be in the tax codes assigned to employers and pension providers by HM Revenue and Customs (HMRC) so people should understand their code and know how to spot tax mistakes.
“Most people are understandably baffled by the whole system of tax codes,” Webb continued. “Employers and pension providers are issued with the codes by HMRC and we generally assume they must be right.
“Although the computerisation of tax records is designed to help improve things, I have no doubt there are many people still paying the wrong amount of tax who should check their tax code as a matter of urgency.”
Tax Help for Older People charity founder Paddy Millard agreed people should not simply assume codes are correct but instead double-check they are paying the right amount.
“Tax codes are probably one of the biggest single causes of confusion and problems amongst the people who contact us via our helpline,” he added.