The North Lanarkshire Council employees were sent the letter by Her Majesty's Revenue and Customs (HMRC) stating their tax codes were changing, meaning they would no longer be entitled to earn their first £9000 tax free.
The error changed their tax codes to ones usually reserved for a second income. It stated they would pay tax on all their earnings from the council, and not just on anything earned over and above the first £9000.
However, workers, who are all due to be paid this week, have now been assured they will not lose out.
A council spokesman said its payroll staff noticed the error and did not apply the changes to staff contracts.
However, Brian Cook, the council's head of Revenue Services, criticised HMRC for sending the letters and causing "a great deal of distress", despite being notified of the error.
Mr Cook, said: "We refused to implement the HMRC tax code changes and have notified all staff their net wages will not be affected.
"It was clear when HMRC notified us of the changes to tax codes that there was an error.
"We contacted them immediately, but they failed to stop letters going to our employees.
"This has caused a great deal of distress, particularly among our lower paid workers."
A spokesman for HMRC said it was extending a new real time information scheme to more than 40 million individual taxpayers and that some mistakes would be encountered.
He said: "In a small number of cases, duplicate employments have been created. A tiny proportion of these have resulted in incorrect tax codes being issued to individual employees."