Coding Notice to Recover Unpaid Tax

By October 10, 2014Uncategorized

This is nothing new, but the current headlines are based around the maximum that can be recovered in this way. If HMRC decided you had an underpayment of income tax of less than £3000, they could change your tax code in order to recover this debt.  For high earners this is now £17000.

 

Tax codes are generally not complicated, the higher the code the more money that can be earned before tax is applied. The standard 1000L code gives £10000 before income tax is payable. There are a few things, such as K codes, that make things interesting and you can get more details here

 

Recovering an underpayment in this way is not as straightforward as it sounds, the debt can be recovered in one year or spread over three years. There is a wealth of guidelines to be applied and things like the 50% of salary maximum for K codes has to be considered. It is possible to claim to reduce the amount due to hardship for instance. You may wish to follow this link.

 

In essence I believe coding out underpayments is a good idea. Everybody should pay the tax they owe, and spreading the cost across the year is more humane than demanding a lump sum. The argument for the amount of tax we should pay can be made elsewhere.

 

There is always the possibility that HMRC will get things wrong. The big problem is that we receive a coding notice, apply this to a salary and instantly the employee receives less money and HMRC more. It is not always fast to get a coding notice put back to where it should be. There is some guidance as to what to do if you believe your tax code is wrong here.

 

The new legislation is giving HMRC powers to instantly start recovering larger debts. There is no need to go to court, it will be faster, cost the rest of the tax payers less money and is all good news. Mostly. The maximum amount that can be claimed in this way is graded from £3000 for those earning less than £30000pa to £17000 for those earning in excess of £90000pa.

 

Higher earners will see the biggest effect and in theory are most able to afford it. I imagine their rights will be the same as anyone else, and they can claim exceptional circumstances to reduce the amount payable in any one year. The issue is more that HMRC can decide there is an underpayment and apply a coding notice, and they do occasionally get things wrong.

 

So, if HMRC is correct then we can all be happy. Somebody has managed to underpay some tax, been caught out, and the money easily recovered through PAYE. There may be issues with drastically reduced income for some individuals, and the biggest issue will be if HMRC manages to make a mistake.

 

For those earning less than £30000pa there is no new issue, those earning more need to pay closer attention.

 

http://www.legislation.gov.uk/uksi/2014/2438/pdfs/uksiem_20142438_en.pdf

 

Robert Lorrimore 10.10.14