If you have earnings from employment and/or any pensions from previous jobs, then tax is normally taken off under the PAYE system. PAYE should collect the right amount of tax from most people each year.

However, you may not have paid the right amount where, for example:

• you were given your annual tax free allowance against more than one job or pension
• a taxable social security benefit – such as incapacity benefit or state pension – was ignored
• you received allowances which were not due to you, or have not received some that were due

A new computer system now enables HMRC to check whether the right amount of tax has been paid, shortly after the end of each tax year, and so thousands of people are now receiving letters with calculations showing that they paid the wrong tax in past years.

If HMRC say you have not paid enough tax

If HMRC’s calculation shows that you have underpaid tax of:

• Less than £50 for that year, then the tax should be written off. If you receive a letter asking for payment, call HMRC on 0845 3000 627 (or the number shown on the letter) and ask for the debt to be cancelled.
• £50 – £2,999.99, HMRC will normally collect the unpaid tax by reducing your PAYE tax code for the next tax year. You should receive a coding notice shortly before the next 5th April showing the reduced code. (2011/12 is the first year that the £2,999.99 limit applies. The previous limit was £1,999.99).
• £3,000 or more, HMRC will ask you to pay the full amount directly. If you do not respond, they will issue a tax return for the year(s) concerned and you will then fall within the system of Self Assessment. The full payment will fall due 3 months later, with interest and surcharges being added for late payments.

Different limits applied up to 5 April 2011, especially in relation to underpayment for the years 2007/08 to 2009/10. In recognition of a backlog of cases following major changes to the HMRC PAYE computer system, underpayments under £300 were not collected.

The system for collecting tax under Self Assessment is explained in section 2.

Points to consider:

Check the calculation

Make sure that your employers and pension providers are correctly shown, and that the figures for income, and tax taken off under PAYE, are the same as those on any documents you hold (P45, P60, P11D or payslips). There is guidance on this on the HMRC website at www.hmrc.gov.uk/P800. If you need guidance or find any error, call HMRC on 0845 3000 627.

Error or delay

There may have been a mistake or delay for which you should not be held responsible. The official guidance says that HMRC must collect the unpaid tax from your employer or pension provider if they have failed to operate PAYE correctly. This could be where they used the wrong tax code, or failed to process a form P45 or P46 correctly when you joined them. Write to HMRC for confirmation that they have checked for any such employer error.

If you think tax was underpaid because of a mistake or delay by HMRC, you can ask them to consider writing off some or all of the tax. It must have been reasonable for you to have thought that your tax code was correct, and HMRC must have delayed using information for at least 12 months from the end of the tax year in which it was received. See the HMRC website at www.hmrc.gov.uk/esc/esc.htm for more details.

Hardship

If a tax debt between £50 – £2,999.99 is to be collected through PAYE, and this will cause hardship if it is all done in a single tax year, you can ask HMRC to spread the collection over two or three years instead.

Avoiding Self Assessment

If the debt is £3,000 or more, there are two alternative ways to get more time to pay, and avoid getting tax returns, but you must contact HMRC without delay:

• if you can pay some of the tax immediately – to reduce the debt below £3,000 – then the rest should be collected through your PAYE code. For example,  Harry owes £3,500 and is able to make a payment of £501 straight away, reducing the debt to £2,999. The remaining debt should then be collected through his PAYE code over one year, and can be extended up to 3 years in case of hardship. This avoids the need to complete tax returns and allows more time to clear the debt

OR

• if you contact HMRC on 0845 3000 627 immediately – and explain that you cannot pay the full amount right away – they should allow you to make payments over a period of time. Such arrangements may extend over several months, or longer, depending on your personal circumstances.

Check any refund

If you have paid too much tax, HMRC will automatically send you a refund. It is still important to check the calculation since, if HMRC has made a mistake, they could ask for the money back later on.

Information for specific years

The pdf files below contain detailed guidance for specific years, together with some draft letters for you to use.

Underpayments 2010-11 to 2011-12

Underpayments for 2009-10 and earlier years