Nearly one million people who did not pay enough income tax have had their repayment demands written off, it emerged today.

An estimated 900,000 workers will now not receive a letter from HM Revenue & Customs (HMRC) demanding extra money after the Government raised the threshold under which it cancels tax owed to £300 (see the 2010/11 Tax Breakdown guide).

Exchequer Secretary David Gauke says: "HMRC will not pursue cases where the amount owed is for less than £300 – an increase from the previous threshold of £50."

So who will be chased for cash?

This concession does not affect the 1.4 million who owe over £300, who WILL be chased for payment because they underpaid income tax during the past two tax years due to errors in HMRC's Pay As You Earn code system.

They collectively owe around £2 billion, or an average of £1,430 each.

Government figures initially suggested 1.4 million in total had underpaid following the computer blunder at HMRC, who it seemed all had to repay the money (see the Tax blunder MSE News story).

It emerged today the true figure was 2.3 million, but only 1.4 million of those owed over £300 so only this group will be expected to cough up.

Owe more than £300? Do you have to pay it?

Tax experts have said people who have underpaid may be able to escape paying extra by asking for an Extra Statutory Concession, also known as an ESC A19 (see the How to fight HMRC demands MSE News story).

People can do this if they can show they provided HMRC with all the required information, but it did not use these details within 12 months of the end of the tax year in which they were received.

Ministers have warned the concession is only likely to apply in a minority of cases.

Interest could be charged

Those who owe more than £2,000 could be charged interest of 3% – six times higher than the Bank of England base rate – on the money they owe if they do not repay it within the as yet undefined deadlines set by HMRC.

However, the 4.3 million people who are due a rebate, averaging £420 each, will be paid interest on the money they are owed by the Revenue at just 0.5%.

A spokesman says: "The rate of interest on overpaid tax reflects the average commercial rate for a return on deposits. No commercial body has the same rates for both paying and charging interest."

HMRC this week begun sending out letters to the nearly six million people who either owe or are owed money. It plans to inform all those who have over or underpaid tax of the situation between now and Christmas.

Further reading/Key links

Tax help: 2010/11 Tax Breakdown, Taxing Times