Underpaid tax and tax code adjustments

Underpaid tax means PAYE took less than you owed for the year. For employees the cause is usually a tax code that was wrong for part of the year, often after a change of job, a second job or a new benefit. HMRC normally sends a P800 tax calculation after the year ends and collects the money by adjusting your tax code for a later year, so it comes out of your pay in instalments. It can also ask you to pay directly through a Simple Assessment.

Common reasons public sector staff underpay

Nearly every case is a code that gave you more tax-free allowance than you were due, or taxed some income at too low a rate.

• A second job or bank work was given a 1257L code, so you got the personal allowance twice.
• Two jobs both on BR, when your total income took you over £50,270 and part of it should have been taxed at 40 per cent.
• Leaving a job without a P45 reaching your new employer, which can leave an emergency code that misses earlier pay.
• A taxable benefit, such as a lease car or private medical insurance, that HMRC did not know about in time.
• Starting to receive a pension, State Pension or interest that pushed you over a threshold.
• An outdated estimate of earnings in your HMRC account, for example after cutting your hours or moving to a much higher band.

How you find out

After each tax year ends on 5 April, HMRC checks the pay and tax reported by every employer. If the total does not match what you owed, it sends a P800 calculation, by post or to your personal tax account. The P800 sets your income from each source and the allowance you were due against the tax you should have paid and the tax actually taken.

Check it line by line against your P60s. Mistakes do happen, especially where employer records show the wrong pay or where a job ended. If the figures are wrong, contact HMRC and explain before paying anything.

How HMRC collects it

HMRC normally collects underpaid tax from employees in one of three ways.

Through your tax code. HMRC reduces your tax-free allowance for a following year by enough to collect the debt across the year’s paydays. A 1257L code might become, say, 1157L, which cuts your allowance by £1,000 and so collects £200 from a basic-rate taxpayer. If the adjustment is bigger than your allowance, you get a K code, which adds an amount to your taxable pay. K tax codes explains how they work and the safeguards on them.

Directly. When collecting through your code is not possible, for example because you no longer have PAYE income or the amount is too large, HMRC sends a Simple Assessment letter with a deadline to pay.

Through Self Assessment, if you already file a tax return.

You can ask HMRC to let you pay the full amount directly instead of through your code, which keeps your monthly pay the same.

In-year adjustments

HMRC does not always wait for the year to end. If it spots a wrong code during the year, it can issue a new one that corrects the allowance and recovers what has been underpaid so far. Take-home pay can drop noticeably for the rest of the tax year. How to check your tax code shows how to read the change.

After a new second job or a big change in hours, updating your estimated income in your personal tax account straight away keeps the in-year correction small.

If you cannot afford the repayments

HMRC is generally willing to spread repayments over a longer period if the amount is large compared with your income, or if the K code or reduced allowance would cause hardship. Contact HMRC as soon as the P800 or the new code arrives, explain your income and outgoings, and ask for a longer collection period or a payment plan. A union representative or Citizens Advice can help if the conversation is difficult, and TaxAid and Tax Help for Older People offer free advice to people on lower incomes.

Overpaid tax works the other way

The same end-of-year check can show you paid too much. The P800 then says how much you are owed and how to claim it, often through your personal tax account. Tax overpaid during the current year because of a wrong code is normally refunded through your pay once HMRC issues a corrected code. Claiming a tax refund covers both routes, and tax when you have two jobs covers the most common source of underpayment.