With the 31st January tax return deadline looming ever closer, employees may be faced with an additional headache. According to the Chartered Institute of Taxation (CIoT), the taxman has issued 25 million incorrect PAYE tax codes for 2010/2011 – double that of the previous year.

Blamed on HMRC’s new computer system, the blunder could see individuals hundreds of pounds short, depending on the level of their earnings.

Andrew Hubbard, president of the CIoT, warned advisors and their business clients to check their new codes. “Most people on PAYE are used to assuming that what the taxman sends them is correct, (filing) away coding notices without bothering to check them.

This year, many of them are being given wrong information, and unless they spot it and tell HMRC, their employer will receive the wrong information too and the employee could get a nasty shock when they open their April pay packet and see it is as much as £100 lighter than they expected.”

Richard Mannion, director of national tax at Smith & Williamson, said that HMRC’s previous system had suffered problems in the past. “They’ve now installed a new system, which is more flexible, but they are having teething problems.”

The mistake is likely to significantly affect pensioners with part-time jobs or people who hold down more than one job, as the system is likely to generate a different tax code notice per job.

People with investment income may also be affected as the HMRC tries to collect tax due on individuals’ estimated investment income, such as bank interest, dividends and rental income, through their tax codes. In many cases this will be based on previous tax returns and may be excessive and out of date.

To avoid undue taxes, all employees must check their tax code and contact HMRC if it needs to be changed. For more information about understanding your tax code visit: www.hmrc.gov.uk/incometax/codes-basics.

A HMRC spokesperson insisted that “the new system is working as it should…as part of our transition to this new system, in the first year, we also expect some of the codes we issue to be incorrect. Anyone in this position should call HMRC to make sure the right tax code is applied.”