What Is A Tax Underpayment Restriction?

If you are wondering what a tax underpayment restriction is, you will find the answer to your question by reading the following blog post. In addition to explaining the term, we will also share the reasons why a tax underpayment restriction may be imposed and suggest the steps to take in such a case.

What Is A Tax Underpayment Restriction?

A tax underpayment restriction applies in cases where the taxpayer has unpaid taxes up to £3,000 and the amount is collected by HMRC through a “coding out” process. This underpaid tax is then collected through weekly or monthly instalments along with the currently applicable tax during a tax term.

If you are faced with a tax underpayment restriction, you will get a “notice of coding” from HMRC. This information should match your P800 if you pay your taxes under the PAYE system or your self-assessment calculation.

What usually happens in such cases is that HMRC reduces the tax code for the next tax term; after considering the taxpayer’s Personal Allowance. However, the underpayment restriction only applies if your tax debt is equal to or less than £3,000.

If you owe the HMRC more than £3,000 in underpaid tax, there will be an underpaid restriction or the option of paying them later in instalments. You will be required to pay back the amount to HMRC directly and through a singular payment.

Why Do I Have Underpaid Taxes?

There are many reasons why you may have underpaid your taxes. Some of these are listed below:

  • The annual tax-free allowance assigned to your earnings was against more than one job or pension.
  • Benefits such as contribution-based Employment and Support Allowance(ESA) or State Pension were not taken into account in your tax codes.
  • You have not received allowances that were due or have not received allowances that you were supposed to.
  • There are untaxed elements such as income, or work expenses included in your PAYE code.

You may be at more risk of having underpaid taxes if you:

  • are new to the PAYE system, hold more than one job, or have changed employers during the tax year
  • were bankrupt and put on a no-tax code and it was not changed for some time 
  • you receive a taxable state benefit, state pension or occupational pension in addition to your earnings as an employee

What Should You Do In Case Of A Tax Underpayment Restriction?

If you have been “coded out” due to a tax underpayment restriction, you would have received a notice of coding. You should use this document to do the following:

  • Make sure that the information in your notice of coding matches that in your P800 or self- assessment tax return and that you actually owe the stated amount as underpaid tax. You can also contact HM Revenue and Customs (HMRC) to request a breakdown of the penalty.
  • Review your tax returns to determine the reason for the underpayment. If you made an error in your tax calculations or missed a tax payment, you will need to correct the error and make the payment as soon as possible.
  • If you owe additional tax, you will need to pay the amount owed as soon as possible to avoid further penalties and interest charges.
  • If you believe that the penalty is unjustified, you may be able to appeal the penalty. You will need to provide evidence to support your case.

However, if you’ve been assigned a “K code” for tax deduction, you will not be able to repay the unpaid tax within one tax term and will need to contact the HMRC for alternative payment arrangements.

If you are on a low income and unable to pay back taxes to the HMRC, you should first contact them and try to work out a mutually workable solution. If you are not successful in your attempt, you can seek advice from professional advisors such as Taxaid.


The above discussion helps to conclude that a tax underpayment restriction applies in cases where a taxpayer has unpaid taxes up to £3000 and is required to pay them back to HMRC through a coding out process. This requires repayment of tax debt through monthly or weekly instalments during a tax term.


What is an Underpayment Restriction?

PAYE12080 – Coding: coding deductions and expenses: underpayment restriction – HMRC internal manual – GOV.UK

Recovery of underpaid PAYE