Underpaid Tax: How HMRC Collects What You Owe Through PAYE and Other Methods

Tax underpayments arise for various reasons: a wrong tax code applied by an employer, benefits in kind not properly coded, income from multiple sources, untaxed savings interest, or a State Pension that exceeds the Personal Allowance. When HMRC identifies an underpayment — usually after reconciling the year's payroll data — it has several tools to collect the outstanding amount. This guide explains each method and how to deal with one if you receive it.

How underpayments arise

The most common causes of tax underpayments are:

• Two jobs both using the Personal Allowance (so the allowance is applied twice).
• A wrong tax code assigned by an employer — often when starting a new job without a P45.
• Benefits in kind (company car, private medical insurance) not reflected in the tax code.
• State Pension plus employment income combining to exceed the Personal Allowance.
• Savings interest, dividend income, or rental income not collected through PAYE.
• A K code error or other coding notice error that reduced deductions.

The P800 notice

After 5 April, HMRC reconciles PAYE records. If you have underpaid tax, HMRC usually sends a P800 tax calculation letter — typically between June and November following the end of the tax year. This shows your income, the tax you should have paid, and the shortfall.

A P800 does not require immediate payment. Instead, HMRC typically uses one of the following collection methods depending on the amount and your circumstances.

Method 1: Tax code adjustment (coding out)

For underpayments up to £3,000, HMRC can collect the amount through your tax code in the following tax year — typically by reducing your code to create higher monthly deductions. For example, if you underpaid £600, HMRC might reduce your code from 1257L to 657L, causing your employer to deduct approximately £50 extra per month over 12 months.

This is the most common and least disruptive method. You do not need to do anything — it happens automatically. The P800 or a separate coding notice will tell you the adjusted code being used.

Method 2: The K code

If your total untaxed income or benefit adjustments exceed your Personal Allowance, HMRC may issue a K code. A K code works in reverse — instead of reducing your gross income for tax purposes, it adds to it. For example, K500 means an extra £5,000 is added to your notional gross before tax is calculated, increasing your monthly tax deductions.

K codes commonly arise when:

• Benefit-in-kind values (company car, private medical) exceed the Personal Allowance.
• State Pension and employment income combine to create a net negative allowance position.
• Multiple years of underpayment are being collected simultaneously.

A K code cannot cause deductions of more than 50% of your gross pay in any single pay period — a statutory safeguard called the 50% overriding limit.

Method 3: Simple Assessment (for underpayments above £3,000 or outside PAYE)

If the underpayment exceeds £3,000, or if you are not in PAYE (e.g. a pensioner with only State Pension), HMRC issues a Simple Assessment (PA302) — a direct bill. This must be paid by 31 January following the end of the tax year (or within 60 days if issued late). See our separate guide to Simple Assessment for full details.

Method 4: Self Assessment

If you are already registered for Self Assessment, any underpayment is collected through your return. The balancing payment due date is 31 January following the end of the tax year. Penalties apply for late filing and late payment.

What to do if you receive a P800 or coding notice

1. Check the figures against your P60, payslips, and any benefit documentation.
2. If you agree, simply wait for the code adjustment to take effect — no action needed for amounts under £3,000.
3. If you think the figures are wrong, contact HMRC on 0300 200 3300. HMRC corrects genuine errors without penalty.
4. If the underpayment arose from an employer error (wrong tax code applied), HMRC will still pursue you for the tax — but you can claim reimbursement from your employer if their error caused the problem and you acted in good faith.

Frequently asked questions

I have been told I owe tax from three years ago. Is it too late for HMRC to collect?

HMRC can generally go back up to four years to assess underpaid tax from genuine errors. However, HMRC's Extra Statutory Concession A19 means that if HMRC failed to use information it had to assess or collect tax within a reasonable time and you acted in good faith, the debt may be waived. This concession has been applied in cases where HMRC had all the information needed but issued a P800 years later. It is worth raising ESC A19 with HMRC if the delay was entirely their fault.