PAYE12070 - Coding: coding deductions and expenses: underpayments

This subject looks at rules to follow when dealing with an underpayment in an individual's code.

This subject is presented as follows

Coding in
How to work out coding adjustment
Objection to underpayment coded: limiting amount
Breathing Space
Whole amount cannot be coded in over 3 years
Work items

Coding in

Underpayments will be calculated and stored by the PAYE Service across End of Year Reconciliation, Accounting, Debits and Credits and Coding (Debits and Credits is fully automated and has no ‘tile’ for user input). When Coding determines that the amount of underpayment, for an individual, can be coded out for a particular tax year, the underpayment amount will be stored as coded out in that tax year. The total amount of an underpayment that is coded out, can comprise of any combination of potential underpayment (PUP) prior 2 July 2017, In Year Adjustment (IYA) from 2 July 2017, actual PAYE underpayment and SA underpayment and mixture of years added together to give the Total Underpayment.

Details of underpayments are held in the Accounting area on the Underpayments Summary screen which can be accessed from the Financial Event Summary screen.

You can choose to spread either all or some of the total underpayment depending on the circumstances of the particular individual, for example in a hardship claim. However, if the underpayment source is from Self Assessment, then the underpayment total will be protected from update preventing the amount being inadvertently spread; in this case it will always be coded out in only one tax year, it will not be permitted to reallocate it to, or spread it across, any other tax year(s).

You should not attempt to code underpayments of income tax where:

1.  The individual does not receive sufficient income from the source against which the underpayment is to be coded.

2.  The 50% K code limit would be exceeded.

3.  The individual’s liability would be doubled - twice as much income tax would be deducted. This is a non-statutory safeguard and can be over-ridden if:

• no other criteria are met, and
• the customer (or their agent) request that we override, and
• the customer has been made fully aware of the impact on their take home pay.

There is no benefit to HMRC or the individual in including an underpayment in the tax code that will not be collected because the 50% limit is exceeded. Additionally, you should not attempt to swap primary or secondary sources, or reallocate allowances in order to code an underpayment. Allowances should only be reallocated in exceptional circumstances. See PAYE13115.

Where the underpayment is greater than PAYE EOY reconciliation tolerances and cannot be collected through the tax code, NPS will send the underpayment amount to ETMP and this is collected by Simple Assessment

Simple Assessment introduces new legislation which replaces the Voluntary Payment process for the 2018 to 2019 tax year and means individual does not need to send a tax return under Self Assessment for the year the underpayment is due PAYE96300.

Underpayments in excess of £2,999.99

Only underpayments of up to £2,999.99 can be recovered through the tax code where the underpayment is from the SA balancing payment for a single year or informal calculations for one or more years have been issued and the underpayment is up to £2,999.99.

The system will check if an underpayment can be collected by the tax code alongside any existing carried forward underpayments and Self Assessment underpayments coded into the reconciled year.  Where the underpayment cannot be coded the system will collect this by Simple Assessment.

The system will review if the carried forward underpayment can be set off against any existing tax paid in the year PAYE96325.

Where the carried forward underpayment is from a Self Assessment year WI158 is created.

Potential underpayments (prior 2 July 2017) or In Year Adjustments (from 2 July 2017) are not included in the £2,999.99 limit and it is possible that £3,000 or more can be included in a code where a potential underpayment (prior 2 July 2017) or In Year Adjustment (from 2 July 2017) arises. For example, where an informal calculation has been issued for CY-1 and the CY code has been reduced to include benefits in kind and a CY potential underpayment and In Year Adjustment being collected in CY+1 has been calculated. Where the Total In Year Adjustment amount cannot be collected in full in CY, e.g. collection of the In Year Adjustment more than doubles their tax liability or deducts more that 50% of their pay, NPS will calculate the maximum tax deductible and the remaining balance of the In Year Adjustment will be collected in CY+1.

An individual may also request some or all of the In Year Adjustment in CY to be allocated and collected in CY+1 because of their financial circumstances or object to the amount being collected in CY.

Example 1

The CY+1 code will include the total underpayment from CY-1 and CY (prior 2 July 2017)

Informal Calculation underpayment CY-1 = £2,850

Potential underpayment CY = £350

Total underpayment coded CY+1 = £3,200

Example 2

The CY+1 code will include the total underpayment from CY-1 and CY (from 2 July 2017).

Informal Calculation underpayment CY-1 = £2,850

In Year Adjustment in CY+1 = £350

Total underpayment coded CY+1 = £3,200

Example 3

The CY code will include the total underpayment from CY-1, In Year Adjustment from the previous year and In Year Adjustment for CY

Informal Calculation underpayment CY-1 = £2,850

In Year Adjustment for CY-1 = £350

In Year Adjustment for CY = £200

Total underpayment coded in CY = £3,400

There will be some cases where an underpayment arises each year or there is no net liability and you will not be able to spread the underpayment. In these cases you should consider collecting the tax by another method such as putting the case into SA or asking for voluntary payments. Where an actual underpayment of £3,000 or more arises, the PAYE Regulations state that the underpayment must not be collected through the tax code. The underpayment should be collected through SA unless a voluntary direct payment is made. This applies whether the underpayment covers one or more years. An SA tax return will need to be issued for each year for which a P800 has been issued.

Further information about underpayments is available at PAYE90001 onwards.

Annual coding

Each year at annual coding the PAYE Service includes in the years coding the total uncleared underpayment. If the individual objects to the amount included, first check that the 50% limit has not been exceeded. If the limit has been exceeded the underpayment will be collected by Simple Assessment (PAYE96300). Where the limit has not been exceeded refer to the guidance at PAYE13075.

How to work out coding adjustment

To code in an underpayment the PAYE Service reduces the coding allowances by the required amount.

Objection to underpayment coded: limiting amount

An individual who does not agree to an underpayment that has been coded may object stating the grounds of their objection. On request, you may limit the amount coded in one year depending on the circumstances.

Full guidance for the specific circumstances is given at PAYE13075.

Note: A PAYE individual cannot request to pay an underpayment by Simple Assessment.

Breathing Space

Where a customer is in a period of Breathing Space we are obliged to pause all recovery action, including the coding out of underpayments.

Where the Breathing Space indicator is set on NPS and the customer had underpayments coded prior to this period, accounting will be updated to code out the underpayments in the following tax year.

If by moving an underpayment to CY+1, it exceeds recovery time limits, consideration will be made whether to collect under Simple Assessment.

Whole amount cannot be coded in over 3 years

You may find a rare case where you cannot code in the whole of an underpayment over three years. Where the underpayment cannot be collected by a tax code the system will automatically collect the underpayment by Simple Assessment PAYE96300. 

If there is no prospect of recovery, remission of the tax due.

Work items

Work items will be generated and the work item description will indicate why the PAYE Service could not automatically include the underpayment in the code. The work items are

Work item number and description	Reason generated
093 - Unable to code U/P - insufficient income - live SA	Generated when there is insufficient income to code out an underpayment and a live SA record is held. See action guide tax36046 WMI093
138 - U/P - Insufficient Income - individual deceased - SA	Generated when underpayment sent by Self Assessment and there is insufficient income and the deceased indicator is set. See action guide tax36196 WMI138
158 – Carry forward underpayment is from an SA year	Created where an underpayment is collected by Simple Assessment and as a result a previously coded out underpayment is sent back to the original year which is SA.
236 - Underpayment cannot be coded out	Generated when the underpayment is not paid by the individual and it cannot be sent to SA or has been rejected by SA see action guide tax36046 WMI236