Underpaid tax guide

Underpaying tax is quite common for a variety of reasons. HMRC will notify you of any underpaid tax  by sending you a P800 tax calculation or a simple assessment letter.

HMRC gathers  all PAYE records onto one system; collecting information from DWP, pension providers and your employer altogether.

At the end of every tax year, this information is reconciled with the income tax paid by every individual and sometimes mistakes are uncovered; taxpayers that have either paid too much or too little income tax.

The consequence could be a welcome (if confusing) tax refund, or a very unwelcome tax bill.

This process typically runs from July to December of each year, with tax refunds being sent before any underpaid tax bills going out.

Our underpaid tax guide lets you know what happens if you don’t pay enough tax and how HMRC recovers underpaid tax through PAYE.

Why have I underpaid tax?

There are a few mistakes that commonly recur for many taxpayers:

  • Untaxed income is missing from the tax calculations because they are not included in your tax code.

It is worth pointing out that it is your responsibility to check your tax code and contact HMRC if you have concerns that it is incorrect.

  • You have received a company benefit like a company car and your tax code hasn’t been changed to reflect the benefit in kind.
  • Personal Allowance amount duplicated because you have a number of jobs with the standard tax code.
  • You have more than one job, your total income lands you in a higher tax band but you have not paid enough tax in the second job.
  • P45 information has not been properly dealt with when you have moved jobs. Resulting in prior pay, wrongly, not being taken into consideration.

How do I check an underpayment of tax?

When you receive a P800 tax calculation or simple assessment letter explaining that you have underpaid tax it’s best practice to check that all income and tax figures related to:

  • your employment or pension
  • taxable state benefits
  • benefits in kind
  • work related expenses and
  • personal allowances are correctly stated.

This is particularly crucial if you have multiple sources of income.

You can cross check your P800 or simple assessment with with data provided by your employer, pension provider and the Department for Work and Pensions (DWP) by using forms P60, P45 (if you’ve changed jobs during the year) or the benefit in kind P11d if you’ve had company benefits like a company car.

You can gain access to these forms online via your personal tax account or by using the HMRC app.

Most of us think that, if a government department is administering something, it will always be correct.

But HMRC is a huge organisation made up of humans (we can all make mistakes) and automated systems which often rely on other sources like employers for accurate information.

With so many moving parts errors can happen so it’s important that you check your tax position regularly.

Underpaid tax included in PAYE coding

HMRC will normally adjust your tax code so that you can pay underpaid tax back over a number of months instead of asking for the full amount back all at once.

Your tax code will be changed with the new code sent to your employer so they can deduct the underpayment moving forward.

Underpaid tax less than £50:

An underpayment for less than £50 is typically cancelled. If you get a letter demanding payment, reach out to HMRC at 0300 200 3300 (or any contact provided in the letter), and request cancellation of the underpayment.

Underpaid tax between £50 and £2999.00:

For amounts between £50 and £2,999.99 HMRC normally recovers the unpaid tax by adjusting your PAYE tax code for the forthcoming tax year. A coding notice should be sent to you explaining the underpayment so you can check it.

Underpaid tax of £3000 or more:

If you owe an amount of £3,000 or more HMRC will require you to remit payment directly to them and won’t adjust your tax code automatically.

I can’t afford an underpayment of tax

In some cases you can come to an agreement with HMRC to extend the length of time it takes to pay what you owe back.

The tax office will try to help you if you explain your circumstances and call the process a time to pay arrangement.

Underpayments ranging from £50 – £2,999.99 can lead to financial distress if collected in a single tax year so you are allowed to request HMRC for an extended period of two or exceptionally three years for payment.

For debts amounting to £3,000 or above HMRC will often issue a self assessment tax return to be completed. This can potentially be avoided if you ask for additional time to repay the underpaid tax you owe.

It’s critical for you to promptly reach out to HMRC on 0300 200 3300 explaining your inability to settle your underpayment instantly or over the period initially stated by HMRC.

Under time to pay HMRC are likely to let you distribute payments over a defined period. These plans could stretch over numerous months or longer, contingent on your individual situation.

Why have I received a simple assessment from HMRC?

The simple assessment is designed for underpaid taxpayers with straightforward financial affairs under PAYE.

Simple assessment is specifically used for taxpayers under PAYE who are unable to have their underpaid tax collected via their tax code.

Underpaid tax and self assessment

If you complete a self assessment tax return you should include any underpaid tax included in your tax code on the tax return.

Your tax return gives you the option to enter underpaid tax included in your tax code during that tax year.

It’s essential to include the underpayment included in your tax code otherwise your self assessment calculation will be incorrect.

What if the underpayment of tax is not my fault?

A fair and important question; some mistakes could be the fault of HMRC, DWP or your employer.

What to do if you have an underpayment and now have an extra tax bill to pay:

First thing’s first find out precisely how the underpayment happened. This can affect what happens next.

In most cases, the taxpayer simply has to pay the amount owed. You get 12 months to pay and you can get an extension for up to 36 months. There is no interest to pay on this debt.

Can I appeal an underpayment of tax?

In some cases, HMRC, your pension provider or your employer could be held accountable and have to pay the underpaid tax bill.

If it is HMRC’s fault, you have to apply using an Extra Statutory Concession A19 (ESC19) document. There are timescales involved in this process.

This conclusion is usually reached if they have taken an excessive amount of time to let you know that you have been underpaying your income tax.

Their own deadline is 12 months from the end of the tax year for which you owe underpaid tax. That means that you won’t hear about 2016-17’s underpayment until April 2017. After this date, ESC19 may be applicable. Occasionally, it has also been used when tax arrears has accumulated over two years.

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