PAYE tax PAYE problems

PAYE is normally straightforward, although problems can arise.

PAYE is designed to balance income and tax, so that what you pay relates to what you earn or receive from your pension provider. 

Unfortunately, there are some circumstances when the system breaks down. You can end up paying too much tax, or less than you owe.

When this happens, HMRC sends out a P800 tax calculation form. This should show how much tax is due to be refunded or is owed for previous years. This guide explains what you need to do if something has gone wrong with your tax. 

Underpaid tax

Where extra tax is due, this is normally collected by adjusting your tax code for the forthcoming year. For most people, this will result in a reduced personal allowance. Where this happens, it is important to check that your full allowance is restored as soon as the tax year ends and the debt has been repaid. 

The maximum that can be collected in this way is currently £3,000. If you owe more, HMRC will expect you to pay at least some of the unpaid tax directly.

In some cases, taxpayers can appeal on the grounds that the tax authorities had full details but failed to act on these in time (Extra-Statutory Concession A19).

Overpaid tax

Where a P800 calculation shows that you have paid too much tax, HMRC will normally refund this by sending you a cheque. 

You should receive payment by September, after the end of the tax year.

Deductions reduce personal allowance

If you receive taxable benefits from your employer (a company car, a loan above £5,000, living accommodation, medical insurance), the value of these is treated as additional income and taxed accordingly. 

To do this, HMRC reduces your tax-free personal allowance.

Deductions exceed personal allowance

Underpaid tax from previous years can sometimes result in a K code for your current deductions. 

Rather than showing how much tax-free allowance your employer should apply, a tax code of this kind, has a figure that shows what extra tax needs to be taken. It works like this:

  • If you owe £11,560, for example, and have a personal allowance of £11,000, the K code will show K46. 
  • This is because you’ll owe £560 more than your allowance and be taxed as if you earned £46.66 (£560 divided by 12) more each month than you actually do.  

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