High earners spared PAYE pain

Most higher-rate taxpayers and investors who file self-assessment tax returns should not be affected by the latest Pay As You Earn (PAYE) problems – although some high earners subject to the new 50 per cent top tax rate will face substantial future bills because of shortfalls in their deductions.

HM Revenue & Customs (HMRC) this week started writing to 5.7m people who have paid the wrong amount of tax via PAYE in the past two years. Of the total, 1.4m are set to receive bills averaging £1,380 while 4.3m others are due refunds averaging £380.

The Revenue said it was “pretty unlikely” that those in the self-assessment system would receive a tax bill or rebate. According to a spokesman: “The vast majority of those affected will be ‘ordinary Joes’” – people on middle or lower incomes.

Under PAYE, individuals are sent coding notices each spring telling them how much tax will be deducted from their pay and pensions in the coming financial year. But as codes are based on previous circumstances, which might since have changed, there are potential under- and over-payments.

However, for the 9m people who fill in annual tax returns, these discrepancies are picked up in self-assessment calculations. John Whiting, policy director at the Chartered Institute of Taxation, said: “If you fill in a tax return, the reconciliation is done for you.”

But the Revenue has confirmed that high earners liable to the new 50 per cent tax rate since April could be caught by another PAYE glitch. As there is no 50 per cent tax code for second or multiple employments, high earners with non-executive directorships or consultancy positions will have only 40 per cent deducted at source from this extra income. The extra 10 per cent – thousands of pounds in some cases – will have to be
settled through self-assessment by January 2012.

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