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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

PAYE: employer errors

If HMRC calculate that you have not paid enough tax but you think that the underpayment arises because your employer or pension provider failed to operate Pay As You Earn (PAYE) correctly, you can challenge HMRC. You can request that HMRC check whether they should be asking your employer or pension provider to pay it instead. Here we explain how you can do this.

Content on this page:

How mistakes happen

PAYE involves three parties:

  • HMRC,
  • those making payments under PAYE, usually employers and pension payers, and
  • the employee or pensioner.

The operation of PAYE is set out in law, together with each of the parties’ responsibilities. Information can pass between all three and sometimes the system breaks down.

The issue considered on this page is whether the employer or pension payer has failed to do something they are required to do by law. For example, they may not have acted on instructions received from HMRC or they may not have followed the correct procedure when taking on a new employee or pensioner.

When PAYE works properly and a correct tax code is operated throughout the year, the tax paid should broadly equal the tax due. There can be small rounding discrepancies of just a few pounds or pence but often these are ignored.

Those making payments under PAYE must follow the rules and deduct the right tax, based on those rules, before paying the net, after-tax, amount to the payee.

Mistakes can happen. Most exchanges between employers/pension providers and HMRC are now electronic rather than by post, but there might be a breakdown in communication.

It can be a very difficult task for you, when receiving an underpayment P800 calculation from HMRC, to work out why you have not paid enough tax. It might be that no-one is at fault – there are situations where PAYE does not collect the right tax.

Alternatively, someone might have made a mistake. Each of the three parties in the process could be at fault. For example,

  • you might not have told HMRC about something affecting your tax affairs,
  • HMRC might not have acted upon information in their possession to get your tax right, or made some error in doing so, or
  • your employer or pension provider might not have followed the rules correctly.

There could also be a far more serious situation where the employer or pension payer has not simply made an error, but they have been generally irresponsible in the way that they have operated PAYE or have deliberately not operated PAYE correctly.

Employer or pension provider mistakes

HMRC records can often show whether an employer or pension provider has taken steps to operate PAYE properly. HMRC should not issue a P800 tax calculation without checking why an employer or pension provider has acted inappropriately.

When you are checking the P800 calculation, you should bear in mind the types of errors that employers or pension providers make:

  • They may not have operated the PAYE code issued by HMRC. Have a look at any coding notices you received from HMRC and compare them to the ‘final tax code’ box on the P60s you should have received after the end of the tax year – if things have been done right, they should usually match.
  • Did you hand in a P45 when you started a new job? Did the code used by your new employer match the one on the P45?
  • If you did not have a P45 to hand in when you started a new job, were you given a new starter checklist to complete? Do you think your employer used the right tax code based on the answers you gave?
  • Your P800 calculation might have included a note to say that you have been given more than one personal allowance on different sources of income. There are a number of ways this can happen, but it could be an indication of employer or pension provider error.

If you suspect that there has been some error by your employer or pension provider, either deliberately or perhaps by way of poor administration, you should contact HMRC.

You might think to ask your employer or pension provider what has gone wrong. However, we suggest instead that you ask HMRC to investigate, as they are in a much stronger and better position to do so.

When contacting HMRC, give details of what you think has gone wrong.

You might not understand the detail, but still feel something has gone wrong that is not your fault. In that case, we recommend you ask HMRC if they have considered whether your employer or pension provider is in any way at fault. If they do not feel that there has been any error on the employer or pension provider’s part, you should get HMRC to explain why the underpayment has arisen.

After you contact HMRC

It is up to HMRC to review the situation and then tell you of their decision, which will be one of the following:

  • That there is no employer or pension provider error, in which case they should tell you why they have reached that conclusion. You should insist that they give you a full explanation of how they think the underpayment has arisen and you should then consider your next move – for example, whether you wish to claim for the tax to be written off under other provisions.
  • That the employer or pension provider is at fault and they are pursuing them for the tax instead of you – in which case you should not have to pay HMRC the under-deducted tax, but your employer might seek to recover the amount from your wages. Whether your employer can do this is a matter of employment law and not one on which we can comment.
  • That the employer or pension provider is at fault but HMRC have concluded from their investigations that they acted ‘in good faith’ and ‘took reasonable care’ to operate PAYE correctly. You can ask how HMRC have reached this conclusion.
  • That the employer or pension provider deliberately failed to deduct the right amount of tax from you and you knew about it.

In the latter two situations, HMRC will need to issue a formal notice – a ‘Direction’ – to both you and your employer or pension payer that they think you should pay the tax. You then have a right to appeal in writing to HMRC within 30 days against their Direction, either by way of HMRC’s internal review system or an independent tribunal.

You should specify your grounds of appeal. Where the issue is whether the employer or pension payer took reasonable care and acted in good faith, you can appeal on the grounds that:

  • the employer or pension provider did not act in good faith,
  • the employer or pension provider did not take reasonable care, or
  • the calculation of the underpayment is incorrect.

Where HMRC suggest that you received payment knowing that tax had not been deducted, your grounds of appeal could be that:

  • you did not receive payment knowing that your employer or pension provider had wilfully failed to deduct tax, or
  • the calculation of the underpayment is incorrect.

The Tribunal may set aside the Direction if they are persuaded that it should not have been made, or increase or reduce the amount of the underpayment shown in the Direction.

It is also possible that your tax underpayment has arisen for more than one reason – in which case, HMRC might consider that part of it is due to an employer or pension provider error, and part for other reasons. They could then treat each part of the tax bill differently – for example, agreeing to pursue your employer or pension provider for part of it and still asking you for the balance.

If you are confused or worried

The key point is that you contact HMRC either by telephone or in writing to raise your concerns over the calculation you have been issued.

When contacting HMRC, keep a note of your conversation and copies of any correspondence and papers sent to them, together with proof of postage.

As noted above, you have rights and should not be afraid to exercise them.

See our page Getting help with tax if you need further support in dealing with HMRC.

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