Mix-up sees Welsh taxpayers charged Scottish rates

HMRC’s difficulties in handling devolved income tax regimes continue, as it has now admitted that some Welsh taxpayers have been given Scottish income tax codes by mistake by their employers so they will be paying the wrong tax

The error by employers, not by HMRC itself, means that some Welsh taxpayers have been asked to pay the wrong rate of tax, just days after HMRC itself applied incorrect tax codes to members of the Scottish parliament (MSPs).

The Welsh government’s devolved powers over income tax came into effect at the beginning of this tax year on 6 April, and the mistake has emerged in the first month of operating the new system.

Under the new Welsh tax code system, overall income tax rates have remained the same as English (rUK) income tax rates unlike Scotland where the tax rates and thresholds are diverging from rUK with different bands of tax and thresholds, with all but the lowest earners paying higher tax than in England. Low earners pay a ‘starter rate’ of 19% on income of £12,501 to £14,549.

For Wales, devolved tax means that the UK government has reduced each of the three rates of income tax by 10%, and from April 2019 onwards, the Welsh government was able to decide the rates of income tax paid by Welsh taxpayers, although this year they retained the same rates and thresholds as those paid by rUK taxpayers.

Under the new arrangements, Welsh taxpayers were given new tax codes beginning with 'C' - for Cymru. However, it has now emerged some taxpayers in Wales were mistakenly assigned 'S' codes when employers ran payrolls, meaning they were instead charged rates set by the Scottish government under its devolved  powers.

The mix-up means those in Wales earning more than £24,000 will have paid 21% tax as opposed to the Welsh rate of 20%. The Scottish government has also introduced an increased higher rate of 41% on earnings above £43,430 and a 46% top rate on income above £150,000.

It is not known how many Welsh taxpayers are affected, but the issue was first raised at the highest levels of HMRC on 2 May by the Welsh government.

Llyr Gruffydd, chair of the National Assembly’s finance committee, said: ‘HMRC’s admission is deeply disappointing as this committee was repeatedly given assurances that mistakes like this would not happen.

‘We raised concerns about the flagging process for identifying Welsh taxpayers during our inquiries into fiscal devolution and the Welsh Government’s draft budget.

‘On each occasion we were told the matter was in hand and the lessons from the devolution of income tax powers to Scotland, where there were similar issues, had been soundly learned and would be put into effect.

‘We are seeking an immediate explanation of how this has happened and will be asking representatives from HMRC to appear before this committee in the near future.’

An HMRC spokesman said: ‘We have been made aware of an error in the application of new income tax codes for Welsh taxpayers by some employers which has meant some taxpayers payed the incorrect amount of tax in April.

‘It is the responsibility of the employer to apply the tax codes provided by HMRC and we are working closely with the employers affected and providing support as they investigate and correct the problem.’

HMRC is adamant that the correct codes were issued to employer payroll departments and said it had communicated with employers and payroll software providers throughout preparations for the introduction of Welsh rates of income tax (WRIT) as well as providing technical specifications and test data to ensure employers and payroll software providers have all the information they require. 

There have been ongoing problems with the rollout of devolved taxes with criticism of communications campaigns by HMRC and low levels of public awareness in the case of the introduction of the Scottish rate of income tax.

In a letter to Gruffydd, published 15 May, Jim Harra, deputy chief executive of HMRC, said: ‘Our experience from the introduction of the Scottish rate of Income Tax was that some employers did not initially operate the S-code correctly. We therefore put plans for further mitigation activity in place for WRIT, which include running a scan in early June to test how well employers are applying the ‘C’ codes issued to them by HMRC. Where there is a discrepancy between the code issued by HMRC and the code applied by the employer, HMRC will re-issue the ‘C’ code to the employer. This mitigation was discussed and agreed at the WRIT Project Board, which includes colleagues from the Welsh Government.

'It is disappointing that despite the engagement we had with employers, some have not applied codes correctly. In some cases, individuals have had the wrong amount of tax deducted. I understand that this was due to issues with the payroll software used by some employers and that employers affected in this way are correcting their systems and explaining the error to their employees.'

Taxpayers have been told they do not need to take any action as errors in the amount of tax paid will be reimbursed through HMRC’s standard tax reconciliation process for PAYE. However, this reinforces important advice to always check payslips carefully to ensure the correct tax and NICs have been deducted at source by employers through the PAYE system.

HMRC also confirmed that they planned to run a check to make sure employers are applying the tax codes correctly, which will take place in June.

Earlier this month it emerged that HMRC had failed to identify 45 of the 129 MSPs as Scottish taxpayers, meaning they had incorrect tax codes, despite the fact the legislation introducing the devolved income tax regime specifically states that all MSPs, Scottish MPs and Scottish MEPs should be treated as Scottish taxpayers by default.

Jim Harra, HMRC letter to Welsh finance committee chair Llyr Gruffydd

Pat Sweet, additional reporting Sara White

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