Up to five million people may be paying the wrong income tax because HM Revenue and Customs' computer systems are "no longer well suited" to handling the tax, the UK National Audit Office has warned.
The figure, which comes in the NAO's report on HMRC's accounts for 2006-07, is five times higher than that identified in a separate report by the public spending watchdog that was published earlier this month.
The earlier examination of income tax collection found that more than a million people were paying the wrong amount of tax because of processing errors.
Speaking as the new report was published, Sir John Bourn, head of the NAO, said: "HMRC's computer systems are no longer well-suited to the efficient administration of income tax, especially where people have more than one job or change jobs frequently."
This was because the systems structured tax records around jobs rather than individual taxpayers. "As a result, the Department can have difficulty identifying all relevant sources of income when calculating tax that should be paid," the report says.
These difficulties had been compounded by inconsistent working practices at HMRC as a result of staff being unaware of or failing to follow procedures.
"Based on its most recent estimates, each year the department may not be pursuing some £880 million of tax due, and taxpayers are likely to have overpaid around £340 million, resulting in potentially five million taxpayers not paying the right amount of tax," the report says.
The NAO noted that HMRC had put measures in place to improve the quality and timeliness of PAYE processing, ahead of the implementation of a new computer system in 2008, but real improvement could only come through "fundamental changes in its computer systems" the NAO said.
The NAO report also revealed that overpayments of tax credits have now hit the £6 billion mark.
By the end of March 2007, HMRC had collected £2 billion of this and written off £700 million, with £3.9 billion remaining to be collected. HMRC had also identified £600 million of in-year adjustments to 2006-07 tax credit awards and set aside £1.6 billion to cover cases where recovery of the money was doubtful, the report says.
The department has also been hit by attacks by organized criminals on its tax credits website, which it was forced to shut down in December 2005. HMRC had made changes to compliance procedures since paying between £1 billion and £1.3 billion to claimants who were not entitled to the money in 2004-05.
But the NAO said these levels were "unacceptably high" and there was "no evidence to demonstrate a lower estimate for 2006-07" – leading the audit body to qualify its opinion on the HMRC accounts.
The findings come just two months after the Commons public accounts committee warned that HMRC "does not have complete information on the causes of overpayments and is uncertain about how far each measure will reduce overpayments" in its fourth report on the crisis-ridden tax credit system, which followed the MPs' examination of last year's NAO report on HMRC's accounts.
In May, the MPs' report put the total overpayments figure at £5.8 billion since the introduction of the scheme in 2003.