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HMRC internal manual

PAYE Manual

HM Revenue & Customs
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Coding: codes: how they are used and calculated: potential underpayments

This subject is presented as follows

Note: From 6 April 2016 the Scottish Government will be responsible for setting their own income tax rates for basic, higher and additional rate bands. Where the Scottish rate of income tax is applicable it will include an S prefix to the tax code. The total rate for Scottish taxpayers is the amount of income tax a Scottish taxpayer will pay on their non-savings and non-dividend income.

All taxpayers will pay tax at the same rate on their savings and dividend income, regardless of their residency status, which is currently the savings and dividend rates. Everyone will also get the same Personal Saving Allowance.

Further information on the Scottish rate of income tax is held at PAYE100035.

NPS will use the correct rates of tax based on the individuals Income Tax Residency Status.

Calculation by system

When the system identifies a potential underpayment it takes into account the estimated pay and makes a calculation based on the individual’s highest rate of tax. The system will include a potential underpayment where the individual is liable to tax, if the individual is not liable the system will not calculate a potential underpayment.

In determining a potential underpayment, the system compares the new calculated code with either the last code recorded against a primary employment or, where there is no previous primary employment coding record, then the Start Tax Code recorded on the Employment Details screen. You will not be able to update a potential underpayment. Reconciliation at the end of the year will establish the actual amount of any underpayment.


The system assumes 10 days pass for codes with suffix T and prefix K and 31 days for cases with suffix L or Y before the new code operates. In this example the code for an individual with Estimated pay of £14,100 (liable at basic rate) is changed from 3756 (code 375T) to 3358 (code 335T) on 25 September.

Net coding allowances before amendment 3756
New net coding allowances 3358
Reduction in allowances 398


Reduction in allowances (398) x basic rate 20 per cent = Full year underpayment £79.60.

Full year underpayment x days since 6 April + 10 / 365 days (79.60 x 182 (172 + 10) / 365) = Potential underpayment to date £39.69.

The calculation will be the same for a Scottish taxpayer but the system will use the Scottish tax rates.

System-calculated code basis altered

If you alter the basis of a code calculated by the system, for instance, change a Week 1 basis to cumulative or vice versa, the system will recalculate any potential underpayment.

Individual is a Jobseeker’s Allowance claimant

The system will not calculate any potential underpayment where the individual is a Jobseeker’s Allowance claimant.

The Benefit Office will automatically calculate any underpayment arising

  • When the claim ceases
  • At 5 April

Manual calculation of potential underpayment

If you need to calculate a potential underpayment manually to give an explanation to an individual, follow the example below.

On 5 June the net coding allowances for a basic rate individual changes, from 3756 (Code 375L) to 3358 (Code 335L).

Net coding allowances before amendment 3756
Net coding allowances 3358
Excess allowances 398


Potential underpayment for full year (398 x 20 per cent) is £79.60.

Proportion from 6 April to date of change of code where Week 1 / Month 1 to be applied is £79.60 x 61 days + 31 days / 365 days = £20.06.

Remember that the system assumes 10 days pass for codes with suffix T and prefix K and 31 days for cases with suffix L or Y before the new code operates.