Example – Tax underpayment collected through code adjustment
Tom is a basic rate
taxpayer. For 2014/15, he is entitled to the personal allowance of £10,000. He
also owes tax of £300 in respect of tax on a let property.
The unpaid tax is
recovered via an adjustment to his code. As he pays tax at 20%, his code
features a deduction of £1,500 to collect the £300 in unpaid tax (£1,500 @ 20%
= £300).
His allowances less
deductions are £8,500 (£10,000 - £1,500) and his PAYE code for 2014/15 is
therefore 850L.
New limits
From 6 April 2015, the current £3,000 limit will be replaced by a sliding scale which will determine the coding out limit. The current £3,000 limit will continue to apply to taxpayers and pensioners with PAYE income of £30,000 or less. The new upper limit of £17,000 will only apply those with PAYE income of £90,000 and above.
The graduated limits applying from 6 April 2015 are shown in the table below:
|
Annual PAYE earnings |
Coding out limit |
|
Up to £29,999.99 |
£3,000 |
|
£30,000 to £39,999.99 |
£5,000 |
|
£40,000 to £49,999.99 |
£7,000 |
|
£50,000 to £59,999.99 |
£9,000 |
|
£60,000 to £69,999.99 |
£11,000 |
|
£70,000 to £79,999.99 |
£13,000 |
|
£80,000 to £89,999.99 |
£15,000 |
|
£90,000 and above |
£17,000 |
The £3,000 limit remains for self-assessment balancing payments and PAYE underpayments.
The 50% cap
Currently, taxpayers with ‘K’ codes (which are negative codes where deductions exceed allowances) enjoy the protection of an overriding regulatory limit, which caps the maximum deduction that can be made at 50% of their PAYE income. From 6 April 2015, this cap is to be extended to all tax codes, thus providing some safeguard for taxpayers to ensure that each month they will be left with at least 50% of their pay.
Not too late to pay
Where unpaid tax is collected via your PAYE code, this will reduce your take home pay each month. While this has the advantage of spreading the collection of the debt over the tax year, it is not for everyone.
If you do not want the debt collected in this way, you will need to pay the overdue amount to HMRC. Otherwise, the unpaid tax will be included in your 2015/16 tax code.
Practical Tip:
Can’t pay? If you are struggling to pay the tax, contact HMRC for advice. Guidance can be found on the HMRC website at www.hmrc.gov.uk/payinghmrc/problems/cantpay.htm.
