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HMRC have problems ensuring that Pay-As-You--Earn (PAYE) is deducted correctly because its computers cannot mind-read. Real-time reporting of PAYE is being introduced from 2013. This will assist greatly in correcting PAYE codings. This is a special summary for advisers.

HMRC regularly issue tax calculations which show underpayments or overpayments.

Three concessions apply to underpayments.

1. For 2009/10 balances of less than £300 will not be pursued by HMRC.

2. For 2010/11 and later, balances of less than £50 will not be pursued.

3. Following an announcement made on 15 September 2010, no interest will be charged on PAYE arrears of £2,000 or more to all unreconciled and reconciled PAYE arrears (so-called legacy balances and these are chiefly those arising prior to 2008/09. HMRC continues to write off many earlier balances.

We have here a summary of the guidance given by a combination of Robin Williams of the Low Income Tax Reform Group (LITRG), and John Whiting of the Chartered Institute of Taxation, together with relevant deadlines and concessions that apply for PAYE and National Insurance Contributions (NICs) underpayments and overpayments following HMRC’s new Powers and Penalties regime. Scroll to the bottom for direct links to LITRG.

What to do if HMRC has written to you

PAYE underpayments

You need to establish the cause of the underpayment.

PAYE overpayments

If HMRC informs you that you have overpaid PAYE you will still need to check that this is correct. You will face a tax penalty if you notice an error and do not point it out or if you fail to disclose any income and this results in a higher refund than would otherwise become entitled to.

PAYE underpayments and those who were on state benefits

If in a year in which you have underpaid PAYE you were entitled to state benefits, then the chances are that you have been underpaid benefits as a consequence (these are calculated on net income after tax). John Whiting points out that the two should balance each other out, but as you cannot backdate benefits there is an issue here. He indicates that he hopes HMRC will come to an equitable solution in the circumstances.

Key points to look out for:

Time limits for PAYE

The Time limits for assessment and claims have changed:

Underpayment: HMRC delay ESC A19

Underpaid tax will not be due if the underpayment was caused by HMRC not acting on information that it was given to adjust a tax coding within a set time frame of 12 months following the end of the tax year. This is according to Extra Statutory Concession A19. 

Overpayment: taxpayer error

Overpayment Relief replaces error or mistake relief from 1 April 2010:

NICs refund limits and deadlines

More information 

The LITRG Guide: PAYE underpayments and repayments 

A guide to automatic reconciliations, what to do if you get a P800 tax calculation. It includes:

HMRC: Latest guidance on PAYE underpayments