HM Revenue & Customs has issued a consultation paper, How to Improve HMRC's Collection of Debt: Coding Out, which proposes to significantly increase the amount of back taxes it can collect from employees' wages through PAYE.
PAYE is not an exact science: when it issues a tax code, HMRC tries to deduct the right amount of tax over the year as a whole but for various reasons it will sometimes turn out to have under-deducted tax - for instance a change of jobs, taking on part-time self-employed work or similar. Where this results in a modest underpayment, HMRC will adjust the following year's tax code to collect a little bit more tax to compensate.
For years, the most that could be collected through "coding out" was an extra £2,000 in tax. In 2011 this was increased to £3,000. But HMRC is now proposing to substantially increase this maximum for people earning over £30,000 a year, from 2015:
| PAYE Earnings | Maximum "Coded Out" |
| Less than £30,000 | £3,000 |
| £30,000 - £40,000 | £5,000 |
| £40,000 - £50,000 | £7,000 |
| £50,000 - £60,000 | £9,000 |
| £60,000 - £70,000 | £11,000 |
| £70,000 - £80,000 | £13,000 |
| £80,000 - £90,000 | £15,000 |
| More than £90,000 | £17,000 |
While it may be true that those earning more may be better placed to suffer larger deductions, they will also be paying more in tax and National Insurance through PAYE in the first place - a "Higher Rate" taxpayer will generally pay 40% tax and 2% primary National Insurance Contributions.
HMRC is proposing to deduct a further £2,000 tax/NI for every £10,000 in salary - in other words, a further 20%. This would be an effective marginal rate of tax of 62% - but the PAYE system is effectively capped to take no more than 50% of an employee's pay. In many cases, it will simply be impossible to collect as much additional tax as HMRC would like.
HMRC's appetite for "coding out" tax underpayments has increased enormously:
"To prevent hardship[,] a limit is necessary to restrict how much can be deducted from a person's salary to recover a debt due to HMRC and/or tax underpayment[s]. This limit is currently £3,000 per year. Whilst the system must treat all earners fairly[,] it is also important that the limit [be] set at a level which allows HMRC to make the best use of this tool to reduce debt."
Really? "Best use" according to whom? What has changed in the last couple of years or so, to warrant an increase of 50%, followed by a further increase of more than 400%? Given that the new Real Time Information system is supposed to improve PAYE and reduce the risk of substantial under- or overpayments, why does HMRC suddenly need the facility to collect a further £14,000 a year?
When HMRC finally got to grips with its backlog of millions of unreconciled PAYE cases from years up to 2010, there were numerous calls for coding out to be "stretched" so that underpayments could be collected over several years, to ease the burden for taxpayers. The system could code out for a maximum of 3 years (see for instance HMRC's PAYE Manual at PAYE 98021) but at the time it was decided that it would cost too much money to change the software to accommodate longer periods. However, it seems it will cost only £1 million to increase the coding limit to £17,000, plus a few other changes. One assertion does not sit easily with the other.
Nor is there any mention in the consultation document of taxpayers' desire for the proposed increases. It would be easy to infer that this has not factored overmuch in HMRC's thinking. Perhaps it should; more so the ability to collect such large underpayments over (say) 5 years or more, as requested several years ago. Even better, if HMRC could improve its own systems in order to help stop such large amounts accruing in the first place. Then we might not need to mention Extra-Statutory Concession A19. Again.
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