Almost 1.5 million workers face demands to pay back an average of £1,400 in tax after an error was found in calculations over the past two years.
In total almost six million people have been affected by the fiasco, with 4.3 million people receiving a rebate because of overpayments.
The errors were discovered after a trawl by the Treasury of the way HM Revenue and Customs was calculating pay as you earn (PAYE) tax. It is likely to lead to an overhaul of the entire system.
Between now and Christmas 1.4 million taxpayers will receive letters telling them that they owe money. The total amount owed is £2 billion which means on average those people face a demand for £1,428 each. Some individuals could face higher bills.
In an attempt to soften the blow to the 1.4 million who have to pay money back, the amount will be taken via future PAYE payments, rather than a single demand. It means many people could be at least £100 a month worse off at a time when household budgets are set to feel a considerable squeeze.
Steven Jackson debt expert at Beatmydebt.com warned that the news would cause difficulties for many people. "Following the recession and now the government cut backs there are currently many people who are just managing to make ends meet. Taking up to £100 a month from their wage packets will mean some fall into arrears with other debts" he said.
Get debt advice early
VAT rises to 20 per cent in January while the Bank of England has warned that workers face a period where inflation is going to outstrip any wage rises.
In addition, some benefits are either being frozen or possibly scrapped as the Coalition tries to reduce the deficit.
The Coalition blamed the last government for the fiasco. A senior Tory source said: “This happened because the last government failed to comprehensively reform the PAYE system. We are now dealing with that mess.”
Jackon suggests that people who find themselves struggling with debts should get expert advice early. "Personal debt is a huge issue for many people but there are sensible solutions available. If you find you are struggling to repay debts due to additional tax being taken from your wages or any other reason, speak to a professional as soon as possible. Debts will rarely go away on their own and left unchecked, they will normally simply get worse" he said.
Fairer tax system to be introduced
For some the mistake will lead to them receiving a rebate.
The total amount that was overpaid by taxpayers was £1.8 billion, meaning an average rebate of just over £400. Those who are owed money will receive a cheque, the HMRC said. Tax codes for next year will be altered to ensure the money is recouped over a period of time, probably a year.
George Osborne, the Chancellor, has said he will introduce a fairer and simpler tax system. He is certain to use the meltdown at HMRC to push for further and swifter reforms to the way tax is calculated and collected.
The tax errors came to light when HMRC officials began their usual end of year “reconciliation process”.
That process found that, of the 40 million people who pay tax through PAYE, there had been around 5.7 million cases in the past two years where the tax had been calculated incorrectly. A Treasury source said: “A decade of meddling and intervening made the tax affairs of millions of families and businesses across the UK extremely complicated.”
Ministers will claim that the Government is now using a computer system which can match taxpayers’ records up automatically and make sure the right amount of tax has been paid.