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HMRC internal manual

PAYE Manual

HM Revenue & Customs
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Coding: coding deductions and expenses: underpayment restriction

When an underpayment of tax is coded out, the system calculates an underpayment restriction based on the rate of tax the individual is liable at the primary employment. The system uses the individual’s rate of liability to calculate the restriction. In cases where the inclusion of the underpayment restriction means that the individual’s liability straddles the rate bands, an appropriate restriction will be calculated to take into account the ‘straddling’.

When an end of year tax calculation results in an underpayment and the underpayment is less than £3,000, the underpayment will be automatically included in the tax code. If the underpayment cannot be coded out because of insufficient income then a work item will be generated.

Where the underpayment is from an NPS reconciliation, up to two voluntary payment letters will be automatically issued by the system. 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.

Further instruction about the work item is in action guide tax40046 WI236.

Where the underpayment is an SA underpayment, work item 093 is created (Action guide tax40046 WMI093).