Over a million to be told they owe more tax

It comes after HM Revenue and Customs (HMRC) carried out an annual check to make sure the amount of tax and National Insurance deducted by employers matches its records.

As a result, 1.2 million will get letters over the coming weeks with the thumping news they owe money for the 2010/11 tax year (April to April), totalling over £700 million. Some will start arriving this weekend.

HMRC said in June that letters for underpaid 2010/11 tax would arrive in autumn. This is in addition to the six million people who paid the wrong tax in previous years.

Meanwhile, it has discovered around six million other cases where people are owed tax between the 2003/04 and 2007/08 tax years, though this doesn't necessarily equate to six million people.

If someone is owed money from two different financial years, it will count as two cases.

These people will also receive letters, which will start to arrive over the coming weeks, though the process could take months due to the sheer number of cases.

Below, we round up what to do if you're affected.

Who is affected?

The errors only relate to those who pay tax via the Pay As You Earn (PAYE) system where money is deducted by an employer or private pension firm.

Within that group, those with complicated affairs are most likely to have been given the wrong tax code by HMRC, meaning the wrong amount of tax was deducted.

This is most likely to affect anyone with more than one job or pension, anyone who has changed job or those who receive benefits via their employer such as health insurance or a company car.

I owe money. How much will it be?

The average amount owed per person is expected to be around £500 to £600, though many will owe much more.

Anyone who owes less than £50 will not be chased for the cash.

I owe money. How do I pay it back?

HMRC says if you owe less than £3,000, this will be collected in stages via your pay packet during the 2012/13 tax year. Some pensioners who were given the wrong tax code will get three years to pay the money back.

To facilitate this, you will get a reduced personal allowance (the amount you can earn before tax is deducted). The current allowance for most is £7,475 a year. This will be reflected in your tax code, which is used by your employer to deduct the correct tax.

If you owe more than £3,000 you will need to make a payment, either in full, or to bring it below £3,000, so it can be taken via your pay packet.

What if I can't afford to pay my tax back?

HMRC says it may be able to spread payments over a longer period but stresses it is not making any promises and will treat each case on individual circumstances.

Can't I wriggle out of payments?

There is a little-known clause dug deep in the HMRC rule-book, called the 'Extra Statutory Concession (ESC) A19', which states the Revenue must give up any tax if it has not followed its procedures correctly.

However, this won't apply in this case as the loophole is only available if the taxpayer is notified of the underpayment over 12 months after the end of the tax year in which the Revenue received the information.

As the latest set of underpayments refer to the tax year which ended in April 2011, and those affected will be notified in the coming weeks, within the 12-month window.

In exceptional circumstances, underpaid tax notified less than 12 months after the end of the tax year may be waived if the Revenue failed more than once to make proper use of the information.

I'm owed money. What happens next?

Rebate cheques will arrive between now and December 2012. It will take this long due to the sheer number of people involved.

HMRC says there is no need to contact it. Those owed money will get it, as long as the taxman has your correct address (see below).

Those owed cash will receive interest at an annual rate of 0.5%, dating back to when the overpayments happened.

Have you changed address recently? Tell HMRC!

Taxpayers who have moved home over the past few years must tell the taxman or risk missing out on a rebate or the demand to pay up.

HMRC sends many crucial pieces of paperwork, such as rebate cheques, to the wrong address because it does not always keep track of people who move. This is despite this information often appearing on correspondence it receives from employers.

Therefore, if you've moved in the past few years, tell HMRC to ensure it has your current address if you've not received any correspondence from it to your new home. See the HMRC website for how to change your details.

Will this happen again?

HMRC admits that, yes, more errors are likely to be uncovered every year due to a mixture of human error, its computer systems and employers failing to inform it of a change in circumstance for one of their staff members.

However, as it now has a new computer system, it says the number of errors will fall.