What Happens If Your Employer Uses The Wrong Tax Code?

If you are wondering what happens if your employer uses the wrong tax code while deducting tax from your salary under the PAYE system, you will find the answer to your question in the following article. This guide will explore the consequences of incorrect tax codes in the UK and provide both employers and employees with tips on how to avoid common mistakes.

What Happens If Your Employer Uses The Wrong Tax Code?

If your employer uses the wrong tax code, there will be an HMRC investigation to probe the details of the cause of this incident and to determine whether the wrong tax code was used on purpose or in error. HMRC will also investigate whether or not you, as the employee were aware of the wrongful use of a tax code on your behalf.

It is important to note here that being assigned the wrong tax code is a common error. However, the consequences of the event will determine what happens during and after an HMRC investigation into the matter.

If you have overpaid your taxes as a result of being assigned an incorrect tax code, HMRC will refund the amount to you. However, if you have underpaid your taxes due to an incorrect tax code, there will be an investigation into the matter.

The HMRC investigation will be based on determining the cause and effect of your being assigned the wrong tax code by your employer. In terms of causes, they will investigate whether:

• your employer has not used the wrong tax code on purpose
• your employer has used the wrong tax code on purpose

If your employer has not used the wrong tax code on purpose and HMRC concludes from their investigations that your employer acted in good faith, they may ask you to pay back underpaid tax to HMRC over some time. At this stage, you can either pay back your tax liability or claim for the tax to be written off under other provisions.

On the other hand, if the HMRC investigation reveals that your employer has used the wrong tax code and you were neither aware nor party to the action, HMRC will declare your employer to be at fault and bear sole responsibility for the consequence.

In this case, HMRC will pursue your employer for the underpaid tax instead of you. However, your employer may pay back HMRC in a lump sum amount but they might seek to recover the amount from your wages. 

The importance of correct tax codes in the UK cannot be emphasised enough. Every year, thousands of employees are taxed incorrectly due to mistakes in their tax codes, which can have serious financial consequences. 

Therefore, employers must ensure that they provide the correct tax codes to HM Revenue and Customs (HMRC) to avoid costly penalties. 

Employees, on the other hand, must also ensure that the codes on their payslips are accurate and up-to-date to avoid being taxed too much or too little. Failure to do so can result in severe financial complications that can take years to resolve.

What Are The Consequences Faced By Employers If They Use The Wrong Tax Code?

Employers have an important responsibility to ensure that their employees are taxed correctly. Incorrect tax codes can result in a range of consequences for employers, including financial penalties and damage to their business’s reputation. Here are some of the consequences of incorrect tax codes for employers:

• Employers can face financial penalties if they provide incorrect tax codes to HMRC. The penalties can be up to £3,000 per employee and can quickly add up for businesses with a large workforce.
• Incorrect tax codes not only affect employees but also damage the trust that they have in their employers. Employees are more likely to trust employers who demonstrate attention to detail and prioritize their financial well-being.
• Incorrect tax codes can lead to employees being taxed too much or too little, resulting in decreased morale and productivity. Employees who feel that their employer is not prioritising their financial well-being may be less motivated to perform their duties effectively.
• Employers can also face legal consequences if they consistently provide incorrect tax codes. Such consequences can range from disputes with HMRC to court proceedings.

Employers need to prioritise accurate tax codes to ensure that both their employees and their business are protected from negative outcomes as the consequences of incorrect tax codes can have serious and long-lasting impacts on both employers and employees alike.

What Are The Consequences Faced By Employees If Their Employers Use The Wrong Tax Code?

Employees can also be negatively affected by incorrect tax codes, and both employees and employers need to understand the potential consequences. Here are some of the consequences of incorrect tax codes for employees:

• Incorrect tax codes can lead to employees paying too much or too little tax. Overpaying taxes can result in financial hardship while underpaying taxes can lead to hefty bills and penalties from HMRC.
• If an employee has overpaid taxes, they are entitled to a tax refund. However, if their employer has provided an incorrect tax code, it can delay the refund process and cause frustration for the employee.
• National Insurance contributions are based on an employee’s earnings, and incorrect tax codes can affect the calculation of these contributions. This can result in employees not receiving the appropriate benefits, such as state pension entitlements.
• Incorrect tax codes can cause financial stress and disruption for employees, impacting their ability to manage personal finances and meet financial obligations, such as rent or mortgage payments.

Providing correct tax codes is crucial for both employers and employees to avoid negative consequences. Employees need to check their payslips regularly and notify their employer if they suspect an error has been made. Employers should also ensure that their payroll systems are up-to-date and accurate, and seek professional advice if in doubt.

How Can You Prevent A Wrong Tax Code In The Future?

Incorrect tax codes can result in serious consequences for both employers and employees. Therefore, employers and employees need to take preventative measures to avoid errors in tax codes. Here are some measures that employers and employees can take to prevent such mistakes:

• Employers should review their employees’ tax codes regularly to ensure they are accurate and up-to-date. Employees should also check their tax codes on their payslips and notify their employer if they suspect an error.
• If in doubt about tax codes, employers and employees should seek professional advice from a qualified accountant or tax specialist. This can help ensure that errors are avoided and the correct tax codes are applied.
• Employers should provide training to their payroll staff to ensure they have the necessary skills and knowledge to process payroll accurately and apply the correct tax codes.
• Employers should stay informed about changes to tax legislation that may affect their employees’ tax codes. Employees should also keep up-to-date with changes that may affect their tax codes.

If you think that your employer has intentionally used the wrong tax code, you should contact and inform HMRC.

Conclusion:

The above discussion summarises the potential consequences of being assigned the wrong tax code by your employer and helps to summarise that taking preventative measures is crucial for employers and employees to avoid errors in tax codes and the negative consequences that can result. By regularly reviewing tax codes, seeking professional advice, providing training to payroll staff, and staying up-to-date with tax legislation, employers and employees can ensure that tax codes are applied accurately and fairly.

References:

Employer errors in deduction of PAYE tax

What Happens if an Employer Makes a Mistake with PAYE? | The Accountancy Partnership

What do I do if my Tax Code is wrong?

Employer or pension payer error | Low Incomes Tax Reform Group