Currently, if you owe additional tax due to a previous underpayment HMRC can collect that amount gradually by adjusting your tax code for the following tax year. This 'coding-out' adjustment increases the amount of tax deducted from your wages or pension each pay period so that you repay what you owe over the course of the year.

Coding out underpayments is generally automatic (subject to limits) but taxpayers can request an alternative repayment method, such as making a direct payment to HMRC or agreeing a Time to Pay arrangement.

From 2029, if a taxpayer is within both self assessment and PAYE, for example an office worker or pensioner who also earns rental income as a landlord, the employer or pension provider will deduct additional tax via PAYE based on the previous year’s self assessment liability. This suggests that coding out will become more widespread and potentially mandatory in many cases. As well as past underpayments, HMRC will use PAYE to collect current-year estimated tax.

The safeguard that ensures PAYE deductions do not exceed 50% of a taxpayer’s PAYE income for any pay period will remain in place.

Details of how this change will be implemented are expected later this year, following a consultation. We will provide affected clients with further information when it becomes available.