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LITRG provides a guide below to your options and rights if HMRC are asking you to pay PAYE tax underpaid for the three tax years to 5 April 2010.

Introduction

You might have received tax calculations (‘P800s’) some time ago showing you have not paid enough tax in the past, but only in recent weeks heard from HMRC about how they want you to pay the balance. HMRC have been issuing these calculations to PAYE taxpayers since September 2010 – first for 2008/09 and 2009/10, then for 2007/08.

If you have had an underpayment included in your PAYE code for 2011/12, our article ‘Tax underpayments included in 2011/12 coding notices’ provides some guidance.

Below we explain what to do if and have received a letter from HMRC asking you to pay direct – either by lump sum or instalments. At the end, we provide a link to a document containing sample letters to help you.

Steps on receiving a letter asking for payment

What you do next depends on whether you:

• agree to pay back the tax; or
• have queried the tax with HMRC; or
• have asked HMRC to investigate if your employer or pension payer has made an error; or
• asked HMRC to review whether the tax can be written off under Extra-statutory Concession A19.

If you agree that you owe the tax and you can afford to pay it back

First, check the figure shown on the letter agrees with the calculations you have been previously sent. Then, consider how you want to pay it – either as a lump sum or by instalments. HMRC can spread the payments over up to three years if you ask. You should not have to provide any evidence that paying it all in one go will cause you hardship and, if you make an agreement and stick to it, you will not have to pay interest.

Try telephoning HMRC on the number provided on the letter to arrange how you can pay by instalments; but if you would prefer to write or cannot get through by telephone, we provide a sample letter (‘letter 3’) in the document at the end of this article.

If you wish to query the tax calculations or are still waiting for an HMRC response to an earlier query

Do not ignore the letter asking for payment. Get in touch with HMRC, explaining that you need or are still waiting for a satisfactory explanation of your calculation and why you must pay it. Try telephoning, or use one of our sample letters at the end of this article (‘letter 1’ if you have already queried the calculations but are waiting for an answer, or ‘letter 2’ if this is the first time you have raised a query about them).

If HMRC are investigating whether your employer or pension payer was at fault, they should not start collecting the tax from you until they have completed their investigations.

If you are asking for the tax to be written off under Extra-statutory Concession A19 or because HMRC gave you misleading or incorrect advice you might still be stuck in a process where you are trying to get an explanation from HMRC or pursuing a formal complaint, or indeed be thinking about taking your case to the Adjudicator. In the meantime, you might come under pressure from HMRC to start making payments.

We recommend you ask them to suspend collecting the tax until your dispute has been resolved. If HMRC do not accept your proposal, ask them to spread the payments over the maximum 36 months while you pursue your dispute. But make it clear that this does not mean you accept you should pay the tax and that you expect a full refund if in due course a write-off is granted.

If you cannot afford to start making payments, even over 36 months, ask HMRC to consider writing off the debt on the basis that you are in long-term hardship. They might agree to this if, for example, you have lost your job and have little or no prospect of being able to pay the tax. Our sample letter (‘letter 4’) can help you to make this request in writing. In it, we have provided some suggested wording, but you will need to change it to explain your own situation.

Self-assessment

It is important you make contact with HMRC when you receive the letter asking for payment. If you ignore it, they might think you are not trying to resolve the matter and send you self-assessment tax returns to complete.

However, HMRC have stated that self-assessment will only be used as a last resort and they should make every effort to resolve any dispute you have about the underpayment and agree payment terms with you without asking you to fill in tax returns.

Means-tested benefits

If you are on a low income, it is quite possible that the extra tax you are paying will affect your entitlement to means-tested benefits. You should contact JobCentre Plus, The Pension Service and/or your local authority to advise them of your reduced income due to the tax you are paying and ask how it affects your entitlement.

If you are not already claiming means-tested benefits, having to pay more income tax could reduce your income so that you become entitled to them, so you should check your situation. For example, you can seek a benefits review from Citizens Advice.

Note, however, that tax deductions do not make any difference to your tax credits entitlement.

Useful links

LITRG’s sample letters can be found on their website and are available as either a Word document or a PDF:
Sample letters to HMRC regarding paying back PAYE tax (Word version)
Sample letters to HMRC regarding paying back PAYE tax (PDF version)