Breaking The Code! Paying Tax Debts Through PAYE Codes

Sarah Bradford examines new rules which will allow HMRC to collect unpaid tax debts of up to £17,000 via an adjustment to the PAYE tax code.

HMRC has been able to collect unpaid tax via an adjustment to a taxpayer’s PAYE code for some time. This process is called ‘coding out’. At present, this method can only be used to collect unpaid tax and Class 2 National Insurance contributions of up to £3,000. However, from 6 April 2015, this limit is to be increased to £17,000. Collecting unpaid tax via the PAYE code is a simple and cost-effective recovery method for HMRC.

How coding out works

A person’s tax code reflects the allowances to which the person is entitled, such as the personal allowance, less deductions to collect tax on benefits-in-kind or untaxed income or to recover unpaid tax.

Example – Tax underpayment collected through code adjustment

Tom is a basic rate taxpayer. For 2014/15, he is entitled to the personal allowance of £10,000. He also owes tax of £300 in respect of tax on a let property.

The unpaid tax is recovered via an adjustment to his code. As he pays tax at 20%, his code features a deduction of £1,500 to collect the £300 in unpaid tax (£1,500 @ 20% = £300).

His allowances less deductions are £8,500 (£10,000 - £1,500) and his PAYE code for 2014/15 is therefore 850L.

New limits

From 6 April 2015, the current £3,000 limit will be replaced by a sliding scale which will determine the coding out limit. The current £3,000 limit will continue to apply to taxpayers and pensioners with PAYE income of £30,000 or less. The new upper limit of £17,000 will only apply those with PAYE income of £90,000 and above.

The graduated limits applying from 6 April 2015 are shown in the table below:

Annual PAYE earnings	Coding out limit
Up to £29,999.99	£3,000
£30,000 to £39,999.99	£5,000
£40,000 to £49,999.99	£7,000
£50,000 to £59,999.99	£9,000
£60,000 to £69,999.99	£11,000
£70,000 to £79,999.99	£13,000
£80,000 to £89,999.99	£15,000
£90,000 and above	£17,000

The £3,000 limit remains for self-assessment balancing payments and PAYE underpayments.

The 50% cap

Currently, taxpayers with ‘K’ codes (which are negative codes where deductions exceed allowances) enjoy the protection of an overriding regulatory limit, which caps the maximum deduction that can be made at 50% of their PAYE income. From 6 April 2015, this cap is to be extended to all tax codes, thus providing some safeguard for taxpayers to ensure that each month they will be left with at least 50% of their pay.

Not too late to pay

Where unpaid tax is collected via your PAYE code, this will reduce your take home pay each month. While this has the advantage of spreading the collection of the debt over the tax year, it is not for everyone.

If you do not want the debt collected in this way, you will need to pay the overdue amount to HMRC. Otherwise, the unpaid tax will be included in your 2015/16 tax code.

Practical Tip:

Can’t pay? If you are struggling to pay the tax, contact HMRC for advice. Guidance can be found on the HMRC website at www.hmrc.gov.uk/payinghmrc/problems/cantpay.htm.