HM Revenue and Customs has pledged to improve the accuracy of its income tax calculations after the National Audit Office found that more than a million people were paying the wrong amount of tax because of processing errors.
The public spending watchdog found that the right amount of income tax was calculated in 95 percent of cases, but errors resulted in underpayments of £125m and overpayments of £157m, affecting a million taxpayers in 2006-07.
Sir John Bourn, head of the NAO, said: "HMRC has improved its processing of income tax returns but there are still substantial numbers of taxpayers who are affected by processing errors. Vulnerable groups such as pensioners are likely to be disproportionately affected."
Accuracy rates in income tax processing varied "significantly" across local offices, ranging from 66 percent to 93 percent on PAYE and from 91 percent to 99 percent for Self Assessment, the NAO's report says.
An HMRC spokesperson responded to the report, which will go to Parliament, saying: "As the NAO themselves say, HMRC accurately calculates the right amount of tax in 95 percent of income tax cases and has improved its processing of income tax returns.
"We are determined to improve this accuracy even further through better management of tax return processing in our offices and the use of dedicated teams to handle more complex cases."
The auditors found that 63 percent of all errors affecting PAYE taxation related to tax coding, while in self assessment, coding errors were responsible for 10 times more errors than any other problem.
But the spending watchdog found that HMRC's projects to automate clerical processes - delivered through its Aspire IT contract with Capgemini - had been "successful in reducing levels of error", although delays to some implementations had meant benefits were delivered later than planned.
Self Assessment coding errors fell by 15 percent between 2005-06 and 2006-07, with a 10 percent drop in coding problems for PAYE - an improvement that partly reflected the introduction of new Coding Assistant software to replace manual data collation and tax code calculation.
But the NAO's report notes: "While the department made use of Coding Assistant mandatory in July 2005, there were delays in achieving widespread implementation so that it only began to have a major impact in early 2006-07."
HMRC had invested regularly in modernizing its IT systems, the NAO said, but "difficulties remain in linking and extracting information from separate systems to accurately maintain taxpayers' records".
The department is planning to spend £156m over the next five years on its PAYE Change IT programme, which is expected to reduce staffing by around 3,000 full-time equivalent employees and generate financial savings of at least £300, a year, including reduced levels of error in tax coding and calculation. A key plank of the program will integrate systems to provide a single customer view.
Phase 1 was completed in 2005, with a second phase completed in April this year. Phase 3 is expected to begin in October.
HMRC's handling of the 10-year Aspire IT contract was heavily criticized by MPs last month, when the Commons public accounts committee revealed that its cost had almost tripled to £8.5bn from original estimates of less than £3 billion in 2003.