PKF-FPM Tax Corner
QUESTION: I recently received correspondence from HM Revenue & Customs stating I have underpaid tax in previous years and they have informed me that they will collect the tax via my PAYE coding notice. Have HM Revenue & Customs the authority to do this?
ANSWER: If you're an employee or receive a company pension you will pay tax under PAYE (Pay As You Earn). This means that your employer or pension provider deducts tax from your salary or pension before you receive it. The amount of tax deducted is worked out based on your tax code.
Changes in your income or circumstances during the year may result in you not paying enough tax at the end of the tax year. If you owe less than £3,000 HM Revenue & Customs normally includes the underpayment in your tax code for the next tax year. You'll pay the under paid amount back in equal instalments usually over one year along with your normal tax deductions from your pay or pension.
If your earnings are less than £30,000, there's no change to the £3,000 coding out limit. But following changes in the law, HM Revenue & Customs are now increasing the amount of debt that they can recover through your tax code each year if your annual earnings are £30,000 or more. To do this they will apply a sliding scale to your main PAYE income. The coding out limits will change for every £10,000 of annual PAYE Earnings above the £30,000 limit and will range from £5,000 to a maximum of £17,000 for those people earning £90,000 and above.
These changes will only apply to underpaid Self-Assessment and Class 2 National Insurance debts and Tax Credit overpayments. Changes will be reflected in your 2015-16 tax code and HMRC will write to you before they collect any debts through your PAYE code from April 2015. The current £3,000 coding out limit will still apply to the collection of Self-Assessment balancing payments and PAYE underpayments. If you get notification that you have underpaid tax you should always check the calculation to ensure that it is accurate.
* Paddy Harty (p.harty@pkffpm.com) is director at PKF-FPM Accountants (www.pkffpm.com).
The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.