From April 2015, HMRC bought in a new legislation which gave them the power to collect debts of up to £17,000 through an individual’s tax code, even without the individual’s consent.
From the 2015 / 2016 tax year, this new method of debt collection referred to as ‘coding-out’ saw an increase from the previous collection limit of £3000 for earnings less than £30,000.
The upper limit for how much debt can be coded out is linked to the tax payer’s income. There is a graduated scale so that the maximum £17,000 can be coded out for a person with earnings over £90,000. There is no change for those with earnings less than £30,000 a year, for whom the maximum remains at £3000. Earnings in this context means earnings from the main source of income paid through PAYE.
The graduated limits are:
|Annual PAYE Earnings||Coding out limits|
|Up to £29,999.99||£3,000|
|£30,000 – £39,999.99||£5,000|
|£40,000 – £49,999.99||£7,000|
|£50,000 – £59,999.99||£9,000|
|£60,000 – £69,999.99||£11,000|
|£70,000 – £79,999.99||£13,000|
|£80,000 – £89,999.99||£15,000|
|£90,000 and above||£17,000|
This scale is applicable to unpaid self-assessment debts, Class 2 NIC debts and Tax Credit overpayments, while a £3,000 coding out limit will still apply for self-assessment balancing payments and PAYE underpayments.
To ensure a consistent approach and to safe-guard employees from excessive deductions from their pay, HMRC extended the ‘legislative 50% overriding limit’ to include all tax codes and not just ‘K codes’. This limits any deductions to a maximum of 50% of an individual’s relevant pay.
HMRC use this power to code out debts only where they have not been voluntarily paid. They first write to you to explain that your Tax Code will change and give you an opportunity to settle your debt in another way. If your debt does appear in your Tax Code, it will be under the heading ‘Outstanding Debt Restriction’. If you do not want debt to be included in your tax code, you will need to either pay the full amount you owe or contact HMRC to arrange a payment plan.
If you receive a new tax code and would like us to review it, please get in touch.