Understanding The PAYE Coding Out System

Are you aware of proposed changes to collect unpaid taxes through the PAYE system? Anything to do with tax collecting often seems daunting for employers in the SME sector, so this article aims to demystify the proposals.


The present system

HMRC is currently able to collect, with a taxpayer’s agreement, tax underpayments and other small debts by adjusting an employee’s PAYE code. It applies to amounts which are less than £2,000 and, as a method of collection, goes a long way towards keeping people clear of the courts. You probably refer to this system as ‘coding out’ and know that it isn’t an automatic process – your employee has to agree to pay their debt in this way.

The proposals

HMRC is proposing to introduce a system, starting in April 2012, which will allow tax debts of up to £3,000 to be automatically collected under PAYE, simply by adjusting an employee’s tax code. Their reasoning is, that by using a ‘cheap, simple, convenient and straightforward method for clearing outstanding debts’, they will be able to put more of their own resources into chasing and recovering high-value debts.

Increasing the coding out threshold to £3000 received universal support from those responding to the draft legislation. Under the proposed system, debtors, some of whom owe a number of small amounts, would be given an easy way of spreading their debt payments. Respondents also considered that the proposed system would satisfy taxpayers who pay their taxes in full and on time, because such citizens would be aware that unpaid debts were being pursued, recovered and used for the greater good.

Following the consultation period, HMRC has now confirmed the following:

  • Work will begin in Autumn 2011 to identify relevant debtors so that the new system is able to be up and running from April 2012.
  • Before a coding notice is issued, taxpayers will be advised that they owe an amount for a particular tax year. There will be an opportunity for a taxpayer to object if they think that, either HMRC has its facts wrong, or they would prefer to pay in some other way. Other methods of payment will be acceptable but if a debt remains unpaid within, say six months of the original demand, then HMRC may issue a notice imposing a coding change.
  • A copy of this notice may be sent direct to you as the employer, or to your payroll provider, and implementation will be expected until the debt has been paid when a revised tax code will be issued.

The new system does not impose any extra burden on you or your payroll provider if you have one, but it does mean that unpaid taxes will be collected in an unobtrusive manner.

This article has outlined the basics of the proposed legislation. As with all government legislation, there is always plenty of detail and it is in your interest to have read and understood the implications for your business. However, unlike some HMRC edicts, the impact on your business really should be minimal.