Coding out debts
The coding threshold entitles taxpayers to have an underpayment of less than £3,000 collected via their tax code, provided they are in employment or in receipt of a UK-based pension. The coding applies to certain debts such as Self Assessment liabilities and tax credit overpayments. Instead of paying off debts in a lump sum, money is collected in monthly instalments over a tax year.
Since April 2014 outstanding Class 2 NIC contributions can also be collected using PAYE tax codes. Class 2 National Insurance Contributions (NICs) are paid by all self-employed taxpayers unless they qualify for the small earnings exemption or other exemptions which remove the necessity to pay NICs. Taxpayers that have received an Annual Coding Notice (P2) and do not want their Class 2 NICs outstanding debt to be included in their tax code need to pay the amount due as soon as possible. Taxpayers with underpayments in the tax year 2012-13 are paying back the amount owed to HMRC (up to £2,999) during the current tax year, which started on 6 April 2014.
HMRC has published a draft statutory instrument which includes proposals to increase the limit on the amount of debt that can be coded out in a year from £3,000 to £17,000. The legislation is open for comment until 22 August 2014. There are also proposals to introduce a graduated scale of payments with an overall cap of 50% of income.