Underpayments of PAYE

Introduction
As an employee paying tax under PAYE, you may expect that the correct amount of tax is deducted at source, but unfortunately, this is not always the case.  About 15% of PAYE taxpayers pay too much or too little tax at source.

HMRC check each individual employee’s tax position after the end of the tax year. Some people may receive unexpected refunds of tax and want reassurance that these are correct; other people may face unexpected tax demands.

What you need to know
Since the introduction of the National PAYE computer system in autumn 2009, HMRC has been able to keep all the PAYE records for each individual on a single system. Employers, pension providers and the Department for Work and Pensions send HMRC information about employment income, pension income and taxable benefits.

At the end of each tax year, HMRC processes this information and sees if the correct amount of tax was collected for each individual. This process is usually started in about July and may continue until December. Refunds are normally issued first, with bills arriving later in the year.

If there have been errors, individual employees may have overpaid or underpaid tax.

HMRC expects all PAYE taxpayers to check and understand their tax codes. If the code was incorrect, or not understood, HMRC expects the taxpayer to make contact to check the position. It follows that HMRC will initially try to recover any underpayment of tax from the employee.

What might go wrong?
Most of the possible errors are discussed the other sections of this guide. Common errors are:

1. Duplication of tax-free personal allowances – such as having two or more jobs with the standard code.
2. Tax codes which do not take account of other un-taxed income, such as taxable benefits received
3. Misprocessing of forms P45 when an employee changes jobs – so previous pay and tax details are incorrectly left out of account
4. Multiple jobs where tax free personal allowance are not all used.
5. Combinations of jobs which produce a higher rate tax liability when taken together, but where insufficient tax has been deducted at source from the second job

Some of these errors may have been caused by the HMRC, the DWP or by systematic errors by an employer.

What action should I take?
It is important to identify the exact error or errors which have caused the underpayment of tax. This may identify a possible claim for Extra Statutory Concession A19 (ESC A19) – under which HMRC may be held liable for underpayments of tax due to its own errors, or due to employer error – under which the employer may be asked to make good the underpaid tax. The timescale for ESC A19 must be checked.

In many cases extended time to pay will be the only solution available to the taxpayer. HMRC will normally allow up to twelve months to repay the tax, but this can be extended, in cases of hardship, up to 36 months, interest free.

There are only limited possibilities for dealing with underpayments of PAYE:

1) HMRC has made an error – and delayed telling the employee

If HMRC has made an error and has delayed telling the taxpayer about the underpayment, then in certain cases, it may give up some or all of the tax demanded under Extra Statutory Concession A19 (ESCA19).

HMRC normally allows itself 12 months from the end of the tax year in which the underpayment arose to notify the taxpayer (though strictly they have 12 months from the end of the tax year in which they receive information).

This means, for example, that for most P800 notices issued for 2016/17, HMRC has until 5 April 2018 to notify the taxpayer of the underpayment. Only after this date could ESCA19 apply.

Exceptionally, ESC A19 may also apply if HMRC has allowed arrears of tax to build up over two or more tax years.

2) Employer or pension provider error

If the underpayment was caused by a systematic error by an employer or pension provider, then HMRC may, in certain cases, agree to collect the underpayment from the employer or pension provider rather than from the taxpayer.

3) It may be possible to arrange time to pay

There are also options where repayment would cause hardship; this is a developing area of policy. HMRC will usually allow up to 36 months to repay any tax due. In very exceptional circumstances, HMRC may suspend recovery

Further information
There is more information on the TaxAid website at
https://taxaid.org.uk/guides/taxpayers/tax-debt/paye