Coding out debts
Taxpayers can elect 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 adjustment 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 year via the PAYE system.
Since April 2014 outstanding Class 2 NI Contributions can also be collected using this method. 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.
New legislation will apply from 2015-16 that will increase the limit on the amount of debt that can be coded out in a year from £3,000 to £17,000 based on a graduated scale. The maximum coding out allowance will only apply to taxpayers with earnings exceeding £90,000.