Three and a half million taxpayers will get tax refunds, typically between £350 and £500, between now and October. BUT another two million will be asked to cough up an average of between £400 and £500 as they have underpaid.

HM Revenue and Customs (HMRC) today confirmed over five million people paid the wrong tax for the 2012/13 financial year, which ended in April (see our Tax Code Calculator to spot errors and our Income Tax Checker for the tax rates).

The news comes as a result of HMRC's annual check of pay-as-you-earn (PAYE) tax records. It stresses 85% of PAYE taxpayers paid the correct amount.

It insists these "reconciliations" are a normal part of the tax process, but in the past critics have hammered HMRC for the complicated system which leads to so many errors in the first place.

Who is affected?

Those most likely to be affected are taxpayers with complicated affairs. This could be because they have more than one source of income, have changed jobs, or receive taxable company benefits such as health insurance.

Letters are only going to those who are employed with tax deducted at source by their employer.

How will I know?

Taxpayers will hear between now and October if they've overpaid or underpaid. The first letters will arrive over the next few days. If you've recently moved, tell HMRC your new address as it rarely changes your details unless you make contact.

But there's no need to wait for HMRC to tell you. Use our Tax Code Calculator to estimate whether you paid the right tax for the previous financial year. A tax code (eg, 944L) may seem innocuous, but it's an iron-clad instruction to employers on what to take from your pay. Our calculator checks if yours is right.

I'm owed money. What happens next?

If you're due a refund, this should arrive by cheque a week to 10 days after the letter if you do nothing.

But if the Tax Code Calculator reveals you're owed cash you can make a claim now. Money could hit your bank account in weeks.

I owe money. What happens next?

If you owe money, and the bill is less than £3,000, it will be collected via your pay packet during the 2014/15 tax year (beginning in April 2014) by adjusting your tax code.

If you owe over £3,000, you can make a payment to bring the bill down to £3,000 so tax can then be collected via your pay packet. You can also come to an alternative arrangement with HMRC if you don't have the funds to do this.

What if I can't afford to pay?

HMRC advises anyone who cannot afford to repay the cash over one year to get in touch, as it may be able to spread it over a longer period.

Can't I wriggle out of payments?

That's very unlikely. A clause dug deep in HMRC's rulebook — the Extra Statutory Concession (ESC) A19 — states the Revenue must give up tax if it fails to use information correctly. Essentially, it gives the Revenue a one-year deadline to tell you about a mistake.

In this case, taxpayers will be notified within the 12-month time limit so this get-out clause does not apply.