PAYE90001 - taxpayer end of year: taxpayer underpayments: introduction

PAYE taxpayer underpayments arise if the taxpayer has not paid enough tax during the year. This could be because the tax code was reduced during the year or the wrong tax code was used.

Most PAYE underpayments can usually be included as a restriction in the tax code for the next complete year. However there are circumstances where this is not possible, for example, underpayments of £2,000 or over (whether for one or more years) and stranded underpayments. Both of these are covered in detail in this section.

When issuing Informal Calculations for more than one year the underpayment will automatically be carried forward to CY+1 to code. The customer will receive notification that the underpayment will be collected through the CY+1 tax code. If this applies COP Function CS will need to be updated and a relevant ENOTE made in order to avoid confusion.

A letter making clear the reason for an underpayment, and how it will be collected, must be sent to the taxpayer or agent unless an explanation has already been given.

An underpayment of any amount that arises through the employer failing to deduct the correct amount of tax from earnings (perhaps by not using the correct code) must be recovered in the first instance from the employer. The underpayment may only be recovered from the taxpayer if a PAYE direction is made centrally by either the PAYE Errors Unit or a PAYE Direction Unit. A PAYE direction effectively transfers liability for tax under-deducted from the employer to the taxpayer. Further information on PAYE direction is available at PAYE90020.