In this section:
- Tax codes - the basics
- Understanding your PAYE Coding Notice
- Emergency tax codes
- Company benefits in your tax code
- Expense payments in your tax code
- Pensions, state benefits and your tax code
- Other income taxed through your tax code
- How underpayments of tax affect your tax code
- If you have more than one tax code
- What to do if your tax code is wrong
How underpayments of tax affect your tax code
You may end up paying too little tax through your tax code if your income increases but we don't know about it right away so haven't adjusted your code, or if your employer or pension provider uses the wrong tax code. Either way you'll often be able to pay back the 'underpayment' - for the current or earlier tax years - through an adjustment to your tax code.
On this page:
- When you might have paid too little tax
- What happens if you've paid too little tax
- How to check your underpayment
- How to understand the adjustment in your code for paying back your underpayment
- How you pay back your underpayment
- More useful links
When you might have paid too little tax
You might have underpaid tax if:
- you started getting company benefits - like a company car or medical insurance and we didn't know about it right away
- other income you have - like investment or rental income - has increased since you last told us about it
- you started getting the State Pension and we didn't know right away
- your employer or pension provider used the wrong tax code
It's very important that you tell us about changes to your income or company benefits as soon as possible so that you don't end up with a large bill at the end of the tax year.
What happens if you've paid too little tax
If we know about your underpayment during the year
We will adjust your current year's tax code right away so that you don't continue to pay too little tax and send you a 'PAYE Coding Notice' telling you what this new code is. This will be based on the latest information that we hold and will make sure that you pay the correct amount of tax for the rest of the year. However, this adjustment will not collect your underpaid tax.
We'll also give you an 'estimate' of how much tax you underpaid during the time when your tax code was too high and explain how we'll collect it by further adjusting your tax code not this year but next.
Bear in mind that the amount we tell you is underpaid is only an estimate - we are just part way through the year and other changes may occur - and we may have to amend it when we check it again at the end of the tax year. You'll get another PAYE Coding Notice telling you what you have to pay back.
If we don't know about your underpayment until the end of the year
In this case we'll amend your tax code for the next year or year after that and write to you telling you how the underpayment happened and how much tax you have underpaid. Just before you're due to start paying back what you owe you'll get a new PAYE Coding Notice - you'll find the amount owed under the entry 'Reduction to collect unpaid tax'.
Understanding your PAYE Coding Notice
How to check your underpayment
Step one: Take the amount by which your tax-free allowances have been reduced and multiply this figure by the highest percentage rate at which you pay tax.
Step two: Multiply this figure by the number of weeks from 6 April to the date we changed your tax code and divide by 52.
Example
You pay tax at basic rate (20%) and your allowances dropped by £1,500 in November because you told us that you'd started to get a company benefit.
To work out your underpayment:
- multiply £1,500 (in this case the value of your company benefit) by 20%
- multiply the resulting figure (£300) by 32 (the number of weeks from 6 April to the date of the change in code) and divide by 52
Your underpayment is £185 (the amount of tax you've underpaid up until the point your tax code changed).
How to understand the adjustment in your code for paying back your underpayment
To work out the amount by which we will reduce your allowances the next year - multiply the amount of your underpayment by 100 and divide the figure by the highest rate of tax that you pay.
Example
You pay tax at the basic rate (20%) and have an underpayment of £185 from the previous year.
To work out the amount that we'll reduce your allowances by, multiply £185 by 100 and divide the figure by 20. The extra amount you'll have to pay tax on is £925 (£925 x 20% = £185 tax).
We add this amount to any other deductions you might have and subtract the total amount from your allowances for the next tax year.
How you pay back your underpayment
Underpayments of less than £2,000
We'll normally give you a new tax code and ask you to pay back the tax owed over one year. However, if you'd prefer to make a lump sum payment call the telephone number on the letter you got from us or contact your Tax Office and ask for a paying-in slip. Once you've made the payment we'll take the underpayment out of your tax code.
If you complete a Self Assessment tax return we'll automatically collect underpayments of less than £2,000 through your tax code unless you've asked us not to on your tax return. If you ask us not to we put the amount owed back in your Self Assessment account or ask you to pay it as a lump sum.
If you can't afford to pay the money you owe write to the Tax Office that asked you for the payment and tell us why. You'll have to give us rough figures for your income, spending, savings and other assets. We may let you spread the payments over more than one year.
Underpayments of £2,000 or more
You can't pay back underpayments of £2,000 or more through your tax code. Instead you'll need to fill in the paying-in slip we sent you with our letter and return it with your payment in the envelope provided. Sometimes we can arrange for you to pay the tax back through the Self Assessment system of 'payments on account'.
More useful links
Find out about taxable company benefits
How we deal with the State Pension in your tax code
How we deal with other income in your tax code
What to do if your tax code is wrong
