HMRC’s Silent Windfall: How £3.5bn in Overpaid Tax Became the Taxpayer’s Problem

A bill too big and a silence too long

HMRC overcharged UK taxpayers by an estimated £3.5 billion in a single year, affecting 5.6 million people. Yet the department is under no obligation to proactively tell those taxpayers a refund is sitting there. This is not a glitch. It is the predictable outcome of a system built to take first and return later, but only if the individual notices the error and pushes back.

Spread across those 5.6 million people the overcharge equates to roughly £625 per taxpayer, an amount that rarely triggers alarm on its own but represents a substantial loss when quietly repeated millions of times.

The tax account that does HMRC’s heavy lifting

At the centre of this is the Personal Tax Account. HMRC lauds it as transparency and empowerment. In practice, it is also a shield. By placing information in the account and nudging people to log in, HMRC can argue that refunds and code details were always available. If a taxpayer does not spot an overpayment or a misapplied assumption, the burden of inaction rests squarely on their shoulders. That framing obscures a hard truth: complex tax coding was never designed for occasional check-ins by busy workers, and many will not understand what they are looking at.

The contrast in treatment is stark. Underpayment triggers letters, recalculations, and often aggressive pursuit. Overpayment produces silence. No warning, no automatic correction, no system-level prompt beyond a portal that many do not visit and fewer fully comprehend. The financial incentive is awkward to confront. When people miss errors, the Treasury keeps the cash.

How miscodings happen and why they linger

Incorrect PAYE tax codes frequently stem from assumptions that once were true or were never true in the first place. A dividend stream from a past year. Freelance income that has ceased. Rental income that no longer exists. Secondary income from an old contract or umbrella role that ended long ago. These assumptions can sit on a record for years, inflating deductions one payslip at a time, unless manually removed. Even when the original assumption started with HMRC or an employer feed, the expectation is that the individual will notice the discrepancy and fix it in the Personal Tax Account.

The £3.5 billion headline figure did not emerge through voluntary transparency. It was forced into daylight via freedom of information requests. That alone speaks volumes about priorities. If overcharging at that scale is known internally, the absence of routine, direct, proactive communications to affected taxpayers demands scrutiny. The default should be a correction, not a digital breadcrumb trail.

Contractors sit in the crosshairs

Contractors are particularly exposed. Multiple contracts, shifting rates, umbrella arrangements, and intermittent self assessment filings all create a moving target. One month you are inside an umbrella, the next you are paid directly; a side engagement ends, a dividend policy changes, a rental void stretches across a year. The data takes time to catch up, if it does at all, and the tax code tries to stitch a patchwork into a single number. Many contractors assume their adviser’s records, payroll feeds, and HMRC’s systems align. They do not. Unless challenged, HMRC will not cleanse a code simply because the facts have evolved.

There is also a knife-edge for higher earners who drift out of self assessment when circumstances change. Without the annual discipline of a return, they inherit the PTA as their primary safeguard. For lower earners and those with limited tax literacy, the expectation to decipher a code, hunt down historic adjustments, and reverse stale assumptions is optimistic at best. The result is a perfect storm where complexity benefits the tax authority and quietly costs the individual.

Power tool or convenient alibi

The Personal Tax Account is undeniably useful. It allows changes to codes, claims for reliefs, and real-time checks on estimated tax. But its dual role is impossible to ignore. By centralising everything in one portal, HMRC can say the information was available and that refunds were there for the taking. When silence costs taxpayers and benefits the Exchequer, the line between service and self-interest blurs.

“Treat your Personal Tax Account like online banking.”

That is the mindset shift contractors now need. Assume errors exist until you prove otherwise. Check for historic assumptions about dividends, freelance projects, rental income, and secondary jobs that no longer apply. Remove what is outdated. Confirm that current earnings, allowances, and benefits are accurately reflected. If something looks wrong, raise a coding query immediately and keep records of every change.

The uncomfortable incentive problem

It is hard to ignore the asymmetry. If you owe, you will be told quickly and with certainty. If you have overpaid, you may never hear a word. The system is designed to collect by default and refund by exception. That may be administratively efficient, but it is not neutral. In practice, indifference to overpayment functions like revenue.

The lesson is clear for the contractor community. Audit your PAYE codes with the same rigour you apply to day rates and contract terms. Do not rely on assumptions that HMRC will put right what time and complexity have quietly skewed. When silence costs money, ignorance is no longer bliss but an expense that quietly compounds year after year.

Our take

Contractor News supports tools that help taxpayers understand and manage their position, and the Personal Tax Account can be valuable when used regularly. However, the scale of overpayment underscores the importance of proactive checks. Contractors should review codes after any change in role, contract type, or income stream and seek corrections promptly. Vigilance remains the most reliable defence against errors that otherwise persist unnoticed.