Stand by your letterbox – tax refund cheques of around £300-£400 will be landing on up to 6m doormats as a result of HM Revenue & Customs finding that huge numbers of people have paid too much tax.
The first cheques should start arriving on Tuesday or Wednesday. "Christmas comes early for 6 million taxpayers," was the headline on a press release from a firm of accountants; however, it omitted to mention that the mammoth mailout is being spread over about 14 months, which means some people won't get their cash until Christmas 2012.
And there is a sting in the tail, too. Around 1.2 million people will be getting bad news from the Revenue over the next few weeks: a letter telling them they have paid too little tax. The typical underpayment is £500-£600.
The refunds and underpayments relate to different tax years, so it is theoretically possible that some people will receive both a cheque and a bill.
So, who's getting the payouts, and who's going to be lumbered with a bill? What is it that people did – or didn't do – that means they are in line for a refund? Guardian Money explains what has happened and gives you some pointers as to whether you might be a winner or a loser.
Let's look at the "winners" first. HMRC revealed this week that up to 6 million people paid too much tax through the pay as you earn (PAYE) system over a five-year period from 2003-4 to 2007-8. The overpayments total £2.5bn.
Strictly speaking, it is 6m "cases", not individual people. Some people could get money relating to several tax years. The average rebate is around £300, though interest that has built up will be added (the interest rate for repayments has changed a lot since 2003 – it has been as high as 4% and as low as 0%). The minimum refund is likely to be £10, while a few people might get "a couple of thousand". If you are owed less than a tenner, bad luck.
Some people will want to know why the department has been sitting on people's money for so long – up to eight years – and is only now getting around to paying it back. HMRC says these were "complicated" legacy cases that typically involved changes in people's circumstances, and until now, it didn't have the IT capabilities to carry out such a mammoth exercise. It has been bedding-in a new system, which means it is now able to clear the backlog.
The good news is that those owed a refund do not have to contact HMRC – it's an automatic process. The not so good news is that many people won't know they are a winner until they get their cheque, and that might not be for months. The department will probably start with the oldest cases first.
So, what types of people may have paid too much tax?
You may have overpaid if:
• You started a new job and had an emergency tax code for a while;
• You only worked for part of the year;
• Your circumstances changed – perhaps you were made redundant, went part-time or became self-employed, and therefore your income fell;
• Other income, such as savings or investment income, reduced but you didn't tell the taxman;
• You didn't tell HMRC about changes to benefits you received through your work, such as a company car, private medical insurance or luncheon vouchers. For example, if HMRC didn't know that you ditched your company car and decided to start cycling to work, or that your employer scrapped the healthcare scheme some time ago, then the taxman may well have been charging you tax on a benefit you've not been receiving;
• Your employer was using the wrong tax code;
• You had more than one job at the same time.
Some commentators described this week's revelations as a monumental tax blunder, but the department disputes this – saying there would always be a minority of people who had paid too much or too little.
Meanwhile, more details have emerged about the 1.2 million people who have paid too little tax through the PAYE system. This relates to the 2010-11 tax year. Letters giving these people more information are going out between now and the end of the year.
In reality, most of those affected will not actually get a bill – instead, their tax code will be changed. In effect, they will pay back what they owe via deductions from their salary during the 2012-13 tax year.
However, the 1.2 million includes 146,000 pensioners, and they will be treated differently. "Where a pensioner has underpaid tax for 2010-11, we will automatically code out that underpayment over a period of three years from April 2012 without them needing to contact us. We will also write to these customers to apologise, explain why the underpayment happened and how we will collect it," the spokesman said. "We have been working with pensioner representatives, who are supportive of our approach."
Last year, when a similar storm erupted, almost 1 million people had their tax debt written off after HMRC said it would not pursue cases where the amount owed was less than £300. However, this concession will not be in place this year, and the threshold has gone back to the standard £50.
At the height of last year's controversy, experts said some people who had underpaid tax might not have to pay if they ask for an "extra statutory concession" known as an ESC A19. This allows HMRC to write off tax in certain situations – but unfortunately it does not apply this time because the timescales are different.
• Don't forget that time is running out for people to file their paper tax returns – the deadline is 31 October. "If you want more time, file it online, and have until 31 January to do so," the department says.