A worker’s thoughts often turn to tax in January.   This is less of a consideration for those who are employed at companies that run a PAYE system as the assumption is that the employer will resolve all tax matters.  However, as employees of JP Morgan recently learnt, if an employer’s tax calculations go wrong it is the employee who may feel the sting.

JP Morgan has been ordered by UK tax authorities to pay approximately £500m in underpaid taxes which it had avoided paying by using an offshore trust for employee bonuses.  Thousands of current and former employees will be required to dip into their pockets to help the company pay back the vast amount owed.

The first an employee knows about an underpayment will be when he receives a tax bill from Her Majesty’s Revenue and Customs (HMRC) notifying him of an underpayment.

An underpayment of tax can occur if an employee’s income increases but he continues to pay tax at the wrong tax code.  A common example is where the employee begins to receive a pension from one employer, but then starts work in a new job.  An underpayment might also arise if an employee gets a company benefit, such as a car or medical insurance, and HMRC do not know about it right away.

If the underpayment is less than £3,000, then the employee can either pay back the amount owed through his tax code or make a voluntary direct payment.  If it is likely the employee will struggle to pay back the underpayment, he can ask HMRC to let him spread the payments over a period of up to three years.

Of course, an employee might think that the underpayment was not his fault and feel that he should not be responsible for rectifying someone else’s mistake.  If he can prove the underpayment was due to an error made by his employer, then he might avoid having to pay back the sum owed.  The first step is to ask the employer to check their records to see whether they made a mistake in the handling of PAYE.  Alternatively, the employee can ask HMRC to carry out an employer error enquiry.

An underpayment might also be due to HMRC failing to use information provided to it, such as details of a new job or receipt of a pension.  If the employee thinks this is the reason for the underpayment, he will have to submit an Extra Statutory Concession to HMRC.

Photo: Egrien