Answers · UK 2025/26

How does HMRC collect tax I owe through my tax code (coding out)?

HMRC can recover underpaid tax of up to GBP 3,000 by reducing your tax-free allowance, spreading the bill across the year through PAYE. To reclaim a GBP 600 underpayment they lower your code so GBP 3,000 less is tax-free (GBP 3,000 x 20% = GBP 600), nudging 1257L down to about 957L.

Last updated: 10 June 2026Last reviewed: 10 June 2026How we verify

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Coding out is how HMRC collects a tax debt - usually shown on a P800 calculation - without sending you a separate bill, provided you are in PAYE and the amount is no more than GBP 3,000. Instead of a lump sum, HMRC reduces your tax-free Personal Allowance so the extra tax comes out gradually over the tax year. Example: you underpaid GBP 600 because untaxed savings interest was not in your code. To claw this back at the 20% basic rate, HMRC needs to make GBP 600 / 20% = GBP 3,000 of your income newly taxable, so it cuts GBP 3,000 from your tax-free amount. Code 1257L (GBP 12,570 tax-free) becomes about 957L (GBP 9,570 tax-free). Monthly tax-free pay drops from GBP 1,047.50 to GBP 797.50, so you pay roughly GBP 50 a month more tax (GBP 250 x 20%) for 12 months, recovering the GBP 600. For higher-rate taxpayers the same GBP 600 needs only GBP 1,500 of code reduction (GBP 1,500 x 40%). If you owe more than GBP 3,000, or have too little PAYE income to absorb it, HMRC asks for direct payment instead. There are upper limits too: those earning more can have larger sums coded out, but never more than 50% of your pay can be taken. Use the Take-Home Pay calculator to see the monthly impact of a reduced code, and read the rules at gov.uk/tax-overpayments-and-underpayments.