Recovery of underpaid PAYE
Problems paying your tax? guide
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 contribution based ESA or state pension, was not taken into account in your tax codes
- you received allowances which were not due to you, or have not received some that were due
- you have untaxed income, or work expenses included in your PAYE code
HMRC’s National Insurance and PAYE System (NPS) enables HMRC to bring together information from employers, pension providers and the Department for Work and Pensions (DWP). After the end of each tax year, HMRC checks that the correct tax amount of tax has been collected for each PAYE taxpayer. This is necessary as PAYE is simply an efficient method of tax collection, not one that always achieves a perfect answer of collecting the tax that is due.
The PAYE Tax Calculation forms (P800s) sent to taxpayers as a result of this annual number crunching exercise, bring together the information HMRC has about each PAYE taxpayer’s circumstances and sources of income.
The exercise is not meant to apply to anyone who submits self-assessment tax returns. If you normally submit a tax return and have received a P800 calculation, you should contact HMRC.
If you have untaxed income, such as rental income, included in your PAYE code, you should take care to check that any estimated amounts have been adjusted.
HMRC estimates that around 15% – almost one in 7 people – will either under or over pay tax through PAYE.
People who are particularly at risk
Some people are at more risk that their tax bill may be incorrect. You may be particularly at risk if:
- You are new to employment, have multiple employments, or have changed jobs during the tax year
- You have been made bankrupt and put on a NT tax code – this code should only apply until the end of the tax year of bankruptcy, or until you change your job, if this happens before the end of the tax year
- You are employed but also receive a taxable state benefit, state pension or occupational pension
If you earned over £50,000 in the tax year and were part of a household which received Child Benefit, you may be liable to pay the High Income Child Benefit Charge. If HMRC is aware of the position, you should be in self assessment. But if HMRC is not aware that the High Income Child Benefit Charge applies to you and you receive a P800 calculation, you will need to take advice. For an overview, see https://www.gov.uk/child-benefit-tax-charge
Annual Tax Summaries
HMRC sends out annual Personal Tax Summaries to most employees. These are for information only – to show you how the tax you pay has been spent. They are not demands for payment or tax calculations – see https://www.gov.uk/annual-tax-summary
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 0300 200 3300 (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.
- £3,000 or more, HMRC will ask you to pay the amount directly to HMRC
- If you do not respond to a demand for payment, then HMRC may issue a tax return for the year(s) concerned. You will then fall within the system of Self Assessment.
Self assessment return for PAYE underpayment
It can be confusing if HMRC issues tax returns, or a notice to file tax returns, for a PAYE underpayment as it is often incorrectly assumed that Self Assessment returns are never required where an individual’s only sources of income have been subject to PAYE. In fact HMRC may issue Self Assessment tax returns to enforce the debt where the underpayment has not been settled.
Where possible it is better to resolve matters with HMRC before tax returns are issued as once they are, there is the risk of late filing and payment penalties and interest.
Note that HMRC will receive powers for ‘simple assessment’ in the Finance Bill 2016, which may avoid the issue of tax returns in this situation – see https://www.gov.uk/government/publications/income-tax-simple-assessment
If you need longer than 12 months to pay the amount due (or are not in a position to pay at all), you should contact HMRC and ask to speak to the Underpayments Specialist Team. In some cases, recovery may be spread over a longer period, or HMRC may agree that you cannot afford to make payments.
The system for collecting tax under Self Assessment is explained in section 2.
Points to consider:
Check the calculation
Make sure that the figures for income and tax paid for employment and pension income, taxable state benefits, benefits in kind, work expenses and personal allowances are correctly shown. This is particularly important if you have more than one source of income. Check the figures against information from your employer, pension provider and the DWP – such as year-end summary forms, P60; form P45 if you have changed jobs during the year; form P11D if you had benefits in kind like a company car. There is guidance on how to do this on the Gov.uk website at https://www.gov.uk/tax-overpayments-and-underpayments.
If you need guidance or find any error, call HMRC on 0300 200 3300.
Error or delay
There may have been a mistake or delay for which you should not be held responsible. The official guidance (http://www.hmrc.gov.uk/manuals/pommanual/paye95011.htm) 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 use the New Starter Checklist correctly when you joined them. Phone or 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.
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 years, or in exceptional cases, three years instead.
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, or two years and can be extended up to three years in case of significant hardship. This avoids the need to complete tax returns and allows more time to clear the debt
- if you contact HMRC on 0300 200 3300 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.
If you are still unhappy with the position
If you are unhappy at being asked to pay tax when you consider that you are not at fault, you may consider making a complaint to HMRC (see https://www.gov.uk/guidance/complain-to-hm-revenue-and-customs ). This opens the door for you to take the matter to the Adjudicator’s Office http://www.adjudicatorsoffice.gov.uk/ the independent body which deals with complaints about HMRC.
You many like to consider if HMRC’s handling of your case has been in line with their service standard ‘Your Charter’. See https://www.gov.uk/government/publications/your-charter
What to do next
You may need professional help to look at all the options. Before you do this you may wish to look at some additional guidance:
On HMRC website https://www.gov.uk/tax-overpayments-and-underpayments
If you think anything is wrong, you should contact HMRC on 0300 200 3300.
If you are on low income, and are unable to resolve matters with HMRC, you may contact TaxAid for advice . Pensioners on low income should instead contact Tax Help for Older People http://www.taxvol.org.uk/
- Pay As You Earn