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HMRC internal manual

PAYE Manual

Reconcile individual: underpayments: PAYE underpayments

From 2 July 2017, when we amend a customer’s code we will carry out a full calculation for the year.  Where extra tax is due the new code will include an In Year Adjustment (IYA) and In Year Adjustment Restriction (IYAR) to collect the extra tax over the remaining weeks or months of the tax year. The tax code will be operated on a week 1 or month 1 basis. This should mean that most of our customers pay the right tax and will not be overpaid or underpaid at the end of the tax year.

From the above date we will not calculate any further Potential Underpayments (PUPs) in tax codes.  We will refer to the extra tax due as an In Year Adjustment (IYA) and the coding restriction will be described as In Year Adjustment Restriction (IYAR).

Only underpayments of up to £2,999.99 can be recovered through the tax code.

Potential underpayments (prior 2 July 2017) or In Year Adjustments (from 2 July 2017) 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 (prior 2 July 2017) or In Year Adjustment (from 2 July 2017) 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 (prior 2 July 2017) or In Year Adjustment (from 2 July 2017) being collected in CY+1 has been calculated. Where the Total In Year Adjustment amount cannot be collected in full in CY, e.g. collection of the In Year Adjustment more than doubles their tax liability or deducts more that 50% of their pay, NPS will calculate the maximum tax deductible and the remaining balance of the In Year Adjustment will be collected in CY+1.

An individual may also request some or all of the In Year Adjustment in CY to be allocated and collected in CY+1 because of their financial circumstances or object to the amount being collected in CY.

Example 1

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

Example 2

The CY+1 code will include the total underpayment from CY-1 and CY (from 2 July 2017).

Informal calculation underpayment CY-1 £2,850
   
In Year Adjustment in CY+1 £350
Total underpayment coded CY+1 £3,200

Example 3

The CY code will include the total underpayment from CY-1, In Year Adjustment from the previous year and In Year Adjustment for CY

Informal calculation underpayment CY-1 £2,850
   
In Year Adjustment for CY-1 £350
In Year Adjustment for CY £200
Total underpayment coded in CY £3,400

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. See Action Guide tax40057. This applies whether the underpayment covers one or more years. An SA return will need to be issued for each year for which a P800 has been issued.

Before triggering a reconciliation you must ensure that, where there is a current live employment, there is also a figure of estimated pay on the record.