A tax blunder means millions of people will soon be informed whether they owe - or are owed - money.(Image - Elizabeth Simpson - Getty Images)

Up to 4.7 million taxpayers will be sent letters later this year by the taxman, telling them they have paid either too much or too little income tax during 2010/11.

This latest blunder means that HM Revenue & Customs (HMRC) will send out letters to people who paid too little tax between April 2010 and April 2011, asking for a total of £720 million.

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Millions affected
Every year HMRC reviews whether people have paid the correct amount of tax via the PAYE system.

This year the review exercise for 2010/11 will take place in late July, and HMRC estimates that between 1.7 and 3.5 million people will be repaid an average of £340 each. A further 1.2 million will owe between £500 and £600 each.

People who have paid too much tax will be sent a cheque in the coming months and calculations for underpayments will be sent in batches after that, with the last going out in December.

If you are presented with a bill you will have time to appeal against the calculation if you think it is wrong. And if you have underpaid, you may be able to request to have the money taken from your earnings each month via a change to your PAYE tax code for 2012/13.

Up to £3,000 per individual will be collected this time via a restriction to your tax code - more than the previous limit of £2,000.

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Not the first error
This is by no means the first error we've seen from HMRC.

Last September, the tax collectors came in for severe criticism when it emerged that 5.7 million people had not paid the correct tax via PAYE for the 2008/09 and 2009/10 tax years.

This meant approximately 1.4 million were forced to pay an extra £1,428 each on average, while around 900,000 taxpayers had debts of up to £300 written off.

The explanation given by HMRC was that a new, more effective, computer system had revealed previous calculation errors.

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