If you use an umbrella company, you may assume your tax is correct. But a recent disclosure obtained under the Freedom of Information Act shows that HMRC overcharged workers by £3.5 billion in income tax in a single year.
About 5.6 million taxpayers were affected, each paying an average of £625 too much (UHY Hacker Young, FOI; uhy-uk.com).
And here’s the part that should make you sit up: HMRC is under no obligation to tell you if you’ve overpaid. The figure only came to light because accountants went looking for it. If you’re not checking your own records, there’s a real chance you’re one of the 5.6 million — and you’ll never know.
So, What’s Behind These Costly Errors from HMRC?
The overcharging largely stems from HMRC issuing incorrect tax codes. Your tax code is what tells your umbrella company how much income tax to deduct from your pay. When it’s wrong, you end up paying either too much or too little, and based on the figures, far too many people are paying too much.
The most common causes are:
- Incorrect assumptions about additional income. HMRC may still have you recorded as earning rental income, dividends, or freelance income that you no longer receive. Tax continues to be deducted as if that income is still there.
- Benefits you no longer have. Company cars, private medical insurance, gym memberships, etc.: if HMRC hasn’t been updated when these end, the tax treatment continues as if they’re still in place.
- Multiple jobs or changing employment. Switching between engagements, taking on additional work, or leaving a second role can all lead to the wrong personal allowance being applied.
- Delayed or inaccurate payroll data. When employers submit Real Time Information late or incorrectly, HMRC essentially has to guess your earnings, and those guesses don’t always work in your favour.
- Missing pension contributions. If pension deductions aren’t properly reflected in your tax code, you can end up paying more tax at source than you should.
Making all of this harder to catch, HMRC has largely moved away from sending paper tax code notices. Many people receive no physical notification when their code changes, so errors quietly continue month after month.
Why Contractors Are Particularly Vulnerable
While anyone on PAYE can be caught out by an incorrect tax code, contractors and temporary workers face a heightened risk. The more complex your income history, the more opportunities there are for HMRC’s records to fall out of step with reality.
Contractors often move between multiple engagements, and each change creates another opportunity for HMRC’s records to become inaccurate. Many have also moved between employment models over the years, sole trader, limited company, umbrella, leaving a more complex tax history than the average permanent employee. Add in previous dividend income, periods of self-employment, or gaps between contracts, and HMRC’s picture of your finances can become significantly out of date.
There’s also a specific risk for higher earners who no longer need to file a Self-Assessment return. Without that annual check-in, it’s easy to rely entirely on HMRC’s automated Simple Assessment to reconcile your tax. But Simple Assessments can be delayed, contain errors, and give only a limited window to respond. If a correction is missed, HMRC may demand payment or roll the error into the following year’s tax code instead.
And contractors can simply be busier than most. Keeping HMRC updated on changes to your circumstances is easy to deprioritise when you’re focused on delivering work. But given the scale of overcharging now on record, letting that slip could cost you.
Don’t Expect HMRC to Fix It Automatically
One of the most striking aspects of this story is how firmly the responsibility sits with the individual taxpayer. HMRC has given people access to their own data through the Personal Tax Account, but it has made clear that it’s up to each person to use it. HMRC is not required to flag up overpayments, and it does not routinely do so.
In practice, this means that unless you query a discrepancy, HMRC is unlikely to make an automatic adjustment. Many taxpayers have no idea they’ve paid too much, so they won’t claim a refund. Even when errors are identified, the process of recovering overpaid tax can be slow, with delays in processing, unanswered written requests, and limited phone access commonly reported.
What You Can Do to Protect Yourself
The tools to check and correct your tax position are available to you right now. Here’s what to do:
- Set up and use your Personal Tax Account
Think of your HMRC Personal Tax Account (PTA) the way you think of online banking, something you check regularly rather than log into once and forget. Your PTA shows you exactly what income sources and benefits HMRC has on record for you, and what tax code has been applied as a result. You can access it at gov.uk/personal-tax-account.
If your PTA lists income from a pension, rental property, company benefit, or other source that you no longer have, you can update it directly. In many cases, your tax code will return to the correct level straight away.
- Check your tax code
Your tax code appears on your payslip and your P60. The standard code for most people with one job and no unusual circumstances is currently 1257L. If yours is different, it’s worth finding out why — particularly if you’ve recently changed contracts, stopped receiving a benefit, or had any other change in your circumstances.
- Tell HMRC when your circumstances change
HMRC won’t automatically know when your income situation changes; it’s on you to keep them informed. If you’ve stopped receiving a benefit, ended freelance or rental income, or moved between contracts, update your details through your PTA or contact HMRC directly.
- Act on your P800 or Simple Assessment notice
After the tax year ends, HMRC may send a P800 or Simple Assessment notice if it finds a discrepancy. If you’ve overpaid, this should trigger a refund, but only if you act on it within the response window. These notices are increasingly digital, so check your online HMRC account regularly rather than waiting for a paper version in the post.
- Keep your payslips and P60s
Hold on to your payslips throughout the year and make sure you receive your P60 at the end of each tax year. These are your evidence if you need to raise a discrepancy with HMRC. As a SmartWork employee, we’ll provide both.
- Get professional advice if something doesn’t look right
If your tax code looks unusual, or you think you may have been overcharged, it’s worth speaking to a tax professional. A review of your PAYE history can identify overpayments and, where needed, a tax adviser can deal with HMRC on your behalf.
How SmartWork Can Help
At SmartWork, we process your pay accurately and transparently, and your payslips will always show exactly how your deductions have been calculated. But the tax code HMRC assigns to you sits between you and HMRC — and that’s why it’s important to keep an eye on it yourself.
If you ever have questions about your payslip, your deductions, or what your tax code means, our team is happy to help. And if you need specialist tax advice, we can point you in the right direction.
The Takeaway
The fact that HMRC had to be forced to disclose a £3.5 billion overcharging figure through freedom of information rules tells you everything you need to know. This isn’t a system that’s going to correct itself on your behalf.
As a contractor or temporary worker, your income situation is more dynamic than most, which means your tax code needs more attention, not less. Checking your Personal Tax Account a couple of times a year, staying on top of any changes to your circumstances, and knowing what to look for on your payslip could quite literally put money back in your pocket.
Don’t assume it’s all being managed for you. With an estimated 5.6 million people overpaying a collective £3.5 billion, and HMRC under no obligation to inform you, the responsibility to act is yours.
Have questions about your payslip or deductions? Get in touch with the SmartWork team today.
