Tax due on earnings from employment and from pensions is deducted by the payer under the PAYE system, which should collect the right amount of tax over the course of the tax year. However, HMRC may calculate at the end of the year that the tax deducted was not correct. See our page on underpayments of PAYE for information on how this can occur.
If there is an underpayment or overpayment, HMRC will issue a form P800 that shows their calculation of the tax. Note that if HMRC issue forms P800 for more than one year, the calculation is cumulative, and it is only the amount shown in the most recent year that is due for payment.
How HMRC seek to recover the underpaid tax depends on the amount:
- Under £2,999.99
- On or over £3,000
What to do if you can’t afford to pay the tax
For all tax debts, you should carefully check the calculation to make sure that HMRC have used the correct figures and seek advice if you don’t understand.
For amounts under £2,999.99.
HMRC will seek to collect the underpaid tax by adjusting your PAYE code for the next tax year. For a £2,000 underpayment for example, this would reduce net pay by £166.66 a month. If you think that this reduction in your net pay would cause you financial hardship, you can ask HMRC to reduce the monthly amount taken from your pay.
You should call HMRC on 0300 200 3300 as soon as possible and explain your circumstances. If you would prefer not to telephone you can write to Pay As You Earn, HMRC, BX9 1AS giving your full name, address and National Insurance number. HMRC may then agree to collect the tax through PAYE over 2 years (and even 3 years in some cases). A PAYE code cannot collect tax that is more than 50% of salary or wages. You can appeal against a decision not to make a requested change to your tax code, HMRC have some guidance on how to make an appeal here.
If you are in receipt of means-tested benefits, you should contact JobCentre Plus, the Pension Service or your local authority to advise them of your reduced income because of the PAYE code adjustment as some benefits are calculated based on after tax income.
Over £3,000 tax underpaid.
Where tax due exceeds £3,000, HMRC will usually issue a form PA302, also called a “simple assessment”. They may also issue this form for amounts of under £3,000 in some circumstances. The Form PA302 creates a legally enforceable debt and permits HMRC to take further steps to recover the tax due.
HMRC will not try to recover the amount shown in the simple assessment through PAYE but will ask for a lump sum payment. If you cannot afford to pay this immediately, there are two options:
- If you could pay enough in a lump sum to reduce the amount owed to less than £3,000 and paying the rest through PAYE over the next 2 or 3 years would be affordable, you should contact HMRC by calling 0300 2003300 and request them to accept an offer on this basis. You can also write to Pay As You Earn, HMRC, BX9 1AS giving your full name, address and National Insurance number.”
- If this is not possible advice on negotiating time to pay is here
