Taxpayers who owe HM Revenue and Customs (HMRC) more than £2,000 as a result of PAYE coding errors will not be charged interest on the sums.
People who request extra time to pay because of the size of the amounts that have been underpaid will see any interest charges that otherwise would have arisen waived, it has been confirmed.
Over two million people have underpaid their income tax over the past two years because of mistakes in the PAYE system.
Of those, some 900,000 are to be relieved of paying anything after the government decided to lift the write-off threshold from £50 to £300, costing the Treasury some £160 million.
The remaining 1.4 million taxpayers owe an average of £1,428. Those with liabilities of less than £2,000 will see the money reclaimed through an amendment of their PAYE tax codes to be introduced in the next tax year.
But those with a liability of £2,000 or more won’t now be charged any interest on the outstanding amounts should they ask for extra time to pay.
Only those who do not engage with HMRC over their outstanding tax bills will face an interest charge.
The announcement came when Dave Hartnett, the Permanent Secretary for Tax, and Dame Lesley Strathie, chief executive of HMRC, were appearing before the House of Commons Treasury Select Committee.
Dame Lesley said: “Ministers have asked us to put in place a new process where anyone who receives the form P800 and has more than £2,000 to pay, the notification will tell them that we will write to them about arrangements to pay. If we agree with that customer that they will pay, then they will not be charged interest.”
Before the new concession, people would have had three months in which to find the money. After that point, interest would have begun to accrue against the sum.
Mr Hartnett said that the concession was intended to offer the same treatment to all taxpayers whatever their liability.
But people need to inform their tax office that they require additional time in which to meet their tax debt and to agree a repayment timetable in order that the concession applies.
Dame Lesley admitted that the backlog of as yet unresolved income tax under- and overpayments could mean that even more people will be sent letters about either sums they owe the tax authorities or money owed by HMRC to them.
There may be as many as 17.9 million unresolved income tax cases pending, but not all will involve a recalculation of tax liabilities.
Dame Lesley told the Select Committee that the “increased accuracy” of the PAYE system, which works out how much is due in income tax and national insurance contributions, lay behind the reconciliation of the incorrect tax records of millions of taxpayers.
She said that HMRC was not issuing “demands for payment” but “assessments of tax that has been paid”.
In addition to those 1.4 million who have underpaid their tax, some 4.3 million have overpaid and are due refunds totalling £1.8 billion.