julie b
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Tax underpayment coding restrictions

Tax underpayment coding restrictions

I have now had two letters from HMRC to say that clients do not have sufficient PAYE income to collect the 2009/10 underpayment via their code in 2011/12.  When I phoned the Revenue this was explained to me that they cannot include a coding restriction if this would collect more than 50% of the tax they would pay without the restriction even though there is sufficient income.  So the clients now have to pay the 2009/10 liability by early March, although they can make an arrangement to pay.  I had never heard of this but I checked the PAYE manual and this appears to be the case.  I have also been instructed that unless the client's PAYE income increases in future we have to check the box to say that the underpayment is not to be collected through the code.

Has anyone else come across this?  It seems unfair to me as the underpayments arose due to coding errors by HMRC in 2009/10.


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11th Feb 2011 12:13


It may be surprising that HMRC is sufficiently joined up to realise that the reduction to the PAYE code required to recover the tax would  breach the standard PAYE rule that the tax deducted must not exceed 50% of the gross pay (based on the 2009/10 figure which is the latest they have got).  However, since they have worked that out, you can hardly complain about them refusing to do something that would not achieve the objective.  The only alternative is to pay the 2009/10 balance due by 31 January 2011 (not sure why you say early March).

Coding errors by HMRC?  Everyone blames them, but why didn't the client or you pick it up from the detailed coding notice?  PAYE is best considered as a payment on account.  If it leaves a balance due, it would be unfair to every other taxpayer if it were not paid.


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11th Feb 2011 16:10

It seems a pretty obvious sort of service ...

... for the SA service software suppliers to provide as an integrated feature in their SATR preparation software: to check whether the contents of the return indicate that a requested PAYE coding recovery is (on the strength of that information) not feasible.

Clearly the user should be able to override it, as there may be information available in the current year to contradict the indicators in the return under preparation.

But the initial calculation should be a one click button press.

Ah well, end of rant. (Actually, perhaps some suppliers do this, just not ours)

With kind regards

Clint Westwood

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By julie b
14th Feb 2011 10:58

Coding notices

It's not a case of taking more than 50% of their income, it is if the tax payable by coding out the underpayment would be more than double what it would be without this.  In their example in the PAYE manual they state that if someone has a tax liability of £200 they cannot include a coding restriction that will take more than a further £200.  On the original submission of the SA tax returns it was accepted that the underpayment would be coded out but it must be only now when they are looking at the 2011/12 coding notices that they have realised there is a problem.  This is why the affected clients have been given until early March to pay.

I had never heard of this before but obviously other people are now getting similar letters.

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14th Feb 2011 12:35

Me too

I have had this too - seems a bit daft.  Are they saying that if someone was currently on a salary of £6475 and a 647L code that no tax could be coded out because currently no tax is being paid?

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By julie b
14th Feb 2011 13:40


That is what HMRC are saying.  So even if the underpayment is relatively small they will not code it out.

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14th Feb 2011 16:04

Is this related to the new PAYE system?

We have also received a couple of letters for our clients and have been told by HMRC that this is being picked up by their new PAYE computer system.


Would someone by kind enough to post the link to the section of the PAYE manual where these regulations ( and examples) are listed please?


Many thanks.

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14th Feb 2011 18:41

This is penalising the low paid

My client's wife rang today.  HMRC are demanding £800 from 2008/09 by 11/3.  She is now only paid £400 per month, so they say they can't collect it through her coding.  So now she has to find £800 up front.

Unfortunatley she ignored the assessment she received in October telling her the tax was due, so not sure if it is still worth an appeal under ESC A19, but have told her to try anyway.

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14th Feb 2011 21:40


Talked to someone helpful at the Revenue today about something similar - we were trying to collect £400 from a PAYE source of £4,000.  Previously the source had been 647L'd so yes, a simple coding restriction wouldn't have done the business.  So can I split the PA between PAYE and Sch D source (£10K).  Then they could restrict the allowances of £3722 by £2,000 - job done.

But no - apparently the system will let them play all sorts of odd games with a personal allowance between various PAYE sources but could not allocate a slice of allowances to Sch D.  It was all or nothing.  So it was a choice between paying the £400 and having the PAYE source put onto BR and then collecting the tax via a K coding.  Not attractive.

I've asked whether this is a novelty for 2011/12 and the guy didn't seem to know - he was getting advice from supervisors.  I always thought you could do what you wanted with a PA - or is this a mistaken memory??

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By julie b
15th Feb 2011 09:26

PAYE manual link


This is where it explains the insufficient income rule.

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15th Feb 2011 11:42

One for Working Together

Yours is one of 4 postings in the last week on this issue and I am posting this comment on all 4.

PAYE12071 says

"When reviewing the tax due for the year do not more than double the customer’s liability by including collection of an underpayment.

For example, if the individual’s estimated pay would result in an annual tax deduction of £200.00, using the normal coding adjustments, the largest underpayment that can be coded is £200.00.  If the underpayment to be coded was over £200.00, you cannot code out the underpayment, as this would more than double the customer’s liability."

I have, by chance, a screen print of this manual section taken a year ago and these 2 paragraphs are not shown.

Trawling through the "Updates to this manual" section of the PAYE manual, the section was updated and new steps added on 1 June 2010.  This would have been soon after an update to NPS was released in April 2010.  As I don't recall similar postings this time last year, then everything points to the fact that there was a change to the NPS software done in April 2010.

I think that this would be a good one for our Working Together group, where I am now going to raise this as an issue.

Kind regards


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By ACDWebb
15th Feb 2011 12:02

It's better than the situation in early days of SA

when I had a client who had retired and no PAYE income, yet still HMRC issued a coding notice for a subsequent year coding out an underpayment, and were not minded to change this when the lack of PAYE to actually collect the tax was pointed out to them.

So the client got a credit on the earlier years return, and a refund(!?) followed by a demand a year later for the tax coded but obviously not collected. Not a problem as he had been warned, but stupid all the same

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