New plans will collect underpaid tax through tax codes a year earlier

What does this mean for employers and employees?

Details are still rather sketchy but tucked away on page 16 of Agent Update 56 is a piece on what HMRC is calling its PAYE refresh project. This is the first step of the proposed changes outlined in paragraphs 2.10 to 2.13 of the consultation document: Making Tax Digital: Transforming the tax system through the better use of information.

From about April 2017, HMRC is intending to use employment and pension data reported under RTI to update tax codes more regularly; the expectation is that this more regular (near real time) updating of codes will mean that many more PAYE taxpayers pay the correct amount of tax in year and that the number of PAYE under and overpayments (P800s) will reduce.

Impact on employers and pension providers

Employers and pension providers are likely to see an increase in the volume of coding notices; HMRC has indicated that they do not anticipate changes being made more frequently than monthly. There may be an increase in contact from employees and pensioners querying the change to their tax code. If the code is wrong employers have to apply the code issued by HMRC so if the code needs to be changed the employee should contact HMRC to make the necessary adjustments either via their Personal Tax Account or by calling HMRC’s helpline on 0300 200 3300.   

Impact on employees and pensioners 

  • Potential underpayments arise when HMRC becomes aware (in year) that a taxpayer will might underpay tax – this might be a new P11D item, it might be a new source of income or an increase in the amount of an income source, but it can be any change that increases the expected tax liability and which results in a non-cumulative code being issued. From 2017/18 HMRC is intending to collect potential underpayments in year, rather than in the following tax year (ie potential underpayments for 2017/18 will be coded in 2017/18 rather than 2018/19)
  • HMRC will also continue to collect any actual 2016/17 P800 underpayments in 2017/18 – under current rules these would not have been coded until 2018/19.

In general this will advance the timing of when individual taxpayers not in self assessment settle PAYE underpayments. In some cases (perhaps 300,000 to 650,000 as a very approximate figure) it will result in taxpayers paying both a potential underpayment for the current tax year and an underpayment for the previous tax year at the same time and they may notice a significant increase in their PAYE deductions. 

The impact will be greatest in 2017/18. There were delays to the PAYE reconciliation process for 2015/16 (ie P800s for 2015/16 were issued later than the usual June to September timeframe). The impact of these changes will be more severe if there is a similar delay to 2016/17 reconciliations – if a 2016/17 reconciliation is not done until November/December 2017 there will be a shorter period over which to collect the underpayment than if a reconciliation is done in June 2017.

HMRC has confirmed the three “hardship” safeguards that may apply to alleviate the impact:

  • The underpayment must be less than £3,000 (this figure will be applied to the combined 2017/18 potential and the 2016/17 actual underpayment figures);
  • The adjustment to collect the underpayment cannot result in the amount being collected more than doubling ie if someone has a tax liability of £1,000 HMRC can’t collect an underpayment of more than £1,000; and
  • The deduction cannot be more than 50% of the amount of income (similar to the restriction that used to apply to K codes only but which now applies to all codes).

In due course, HMRC expects to enable in year repayment claims through the Personal Tax Account. The Personal Tax Account already allows refunds to be claimed once a tax year is complete and a facility to allow payment of P800 PAYE underpayments was introduced in November 2016.


This project is one aspect of Making Tax Digital for individuals and the Tax Faculty will publish further information as it becomes available.