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
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), 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
- The individual does not receive sufficient income from the source against which the underpayment is to be coded
- The individual’s liability would be doubled - twice as much income tax would be deducted
- The 50 per cent K code limit would be exceeded
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 per cent 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 cannot be collected through the tax code up to two voluntary payment letters will be automatically issued by the system. The first voluntary payment letter will not be issued if the underpayment is less than £50. If the individual hasn’t paid the outstanding amount after the second letter has been issued NPS will
- Send the underpayment to SA. If there is an SA record it will be reactivated. If the individual does not have an SA record one will be created.
- Create work item 236 if there isn’t an SA record or one has not been created
If the underpayment is rejected by SA, work item 236 is also created.
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.
Where an informal calculation underpayment and an SA underpayment are put forward to be coded in the same year, and individually they are both within the £2,999.99 limit but together they total £3,000 or over, then the Annual Coding process will generate work item 236 (PAYE90011).
Potential underpayments 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 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 has been calculated. The CY+1 code will include the total underpayment from CY-1 and CY.
Informal Calculation underpayment CY-1 = £2,850
Potential underpayment CY = £350
Total underpayment coded CY+1 = £3,200
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.
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 per cent limit has not been exceeded. If the limit has been exceeded consider collecting the underpayment by voluntary payment. 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.
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. You may then have to consider the following methods of clearing it
- Ask the individual to make a voluntary payment to cover all or part of the underpayment, send a letter together with a payslip P254A(or B)(Z)(NEW)
- Set the individual up in SA
- If there is no prospect of recovery, remission of the tax due
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
|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 tax40046 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 tax40196 WMI138|
|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 tax40046 WMI236|