HMRC Underpaid Tax Letter UK — What to Do and How to Pay

Receiving a letter from HMRC saying you have underpaid tax can be alarming. But these letters are more common than many people realise — HMRC sends hundreds of thousands of P800 tax calculations and Simple Assessment notices every year. Most relate to relatively modest sums, many result from straightforward administrative issues, and in a significant number of cases the figures can be challenged. This guide explains exactly what these letters mean, why they arise, and what your options are.

Why HMRC Sends Underpaid Tax Notices

The UK's PAYE (Pay As You Earn) system is designed to collect Income Tax and National Insurance automatically through your employer. In theory, PAYE should result in exactly the right tax being paid by the end of each year. In practice, it frequently does not — for several reasons.

1. Wrong or Outdated Tax Code

Your tax code tells your employer how much tax-free allowance to apply to your pay. If the code is wrong — too generous — your employer deducts too little tax throughout the year. Common reasons for wrong codes:

• Previous employer reported your income incorrectly when you left
• HMRC was not notified of a job change promptly
• You had multiple jobs and tax codes were applied in the wrong order
• Emergency code (1257L Week 1/Month 1) was not updated to a cumulative code

2. Multiple Jobs or Pension Income Alongside Employment

If you have two jobs, your Personal Allowance (£12,570) is typically applied entirely against one employer's earnings. If both employers apply the allowance — or if the higher-income job doesn't hold enough — tax will be underpaid. Similarly, if you draw a private pension whilst still employed, the pension provider may apply an incorrect code.

3. Savings Interest Exceeding the Personal Savings Allowance (PSA)

The PSA for 2026/27 is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. If your savings interest exceeds your PSA and you are a basic rate PAYE taxpayer who did not register for Self Assessment, HMRC will often correct this via a P800 or Simple Assessment rather than forcing you to file a tax return.

With bank interest rates significantly higher in 2024–26 than in the previous decade, PSA breaches have become more common across a wider income range.

4. State Pension Plus PAYE Employment

The new State Pension is paid gross by DWP — it is taxable income but no tax is deducted at source. If you also have employment or pension income, the State Pension is included in your overall income for tax purposes. HMRC usually adjusts your employment tax code to collect tax on State Pension, but this adjustment does not always occur correctly, especially in the transition year of reaching State Pension age.

For 2026/27, the full State Pension is approximately £11,973/year. For someone also earning £20,000 from employment, their total taxable income is £31,973 — but without the correct tax code adjustment, PAYE on the employment income alone might not collect tax on the full amount above the Personal Allowance.

5. High Income Child Benefit Charge (HICBC)

If you or your partner earns over £60,000 and you claim Child Benefit, the High Income Child Benefit Charge applies. This is collected via Self Assessment or, increasingly, via PAYE code adjustment — but many people do not realise they are liable, do not register for Self Assessment, and accumulate underpaid tax over multiple years.

The HICBC was reduced from a tapering start at £50,000 to a new threshold starting at £60,000 from April 2024. If you previously overpaid under the old rules, you may actually be owed a refund.

6. Investment Income, Rental Income, or Freelance Work

Any income not reported through PAYE — rental profits, self-employment income, large dividend amounts, or income from trusts — may not have had the correct tax deducted during the year.

The P800 Tax Calculation Letter

The P800 is HMRC's standard end-of-year tax calculation. It is sent after April 5 each year (typically June–November) to PAYE taxpayers whose tax records indicate an over- or underpayment.

What the P800 shows:

• Income received from each source during the tax year
• Tax paid (from employer and other PAYE sources)
• Calculated tax due
• Difference: the underpayment or overpayment

If you are owed a refund: HMRC will typically offer a bank transfer (if they have your details) or a cheque. For amounts below a threshold, HMRC may adjust next year's code instead of issuing a separate payment.

If you owe tax: See the collection options below.

Simple Assessment: When You Have No Self Assessment Return

Simple Assessment is used by HMRC where:

• You have underpaid tax but do not currently file a Self Assessment return, and
• HMRC believes it can calculate your liability using data already held (employer submissions, DWP, banks)

You receive a PA302 letter (Simple Assessment notice), not a P800. It shows the same type of information — income, tax paid, balance due. The key difference is that a Simple Assessment carries a statutory payment deadline of 31 January following the end of the tax year (same as Self Assessment), and interest runs from that date if unpaid.

How HMRC Collects Underpaid Tax

HMRC has several routes to collect, and the method depends on the size of the debt and timing.

Method 1: Tax Code Adjustment (Most Common for Small Amounts)

For underpayments up to £3,000, HMRC normally collects by adjusting your PAYE tax code in the following year. The underpayment is divided by your notional annual income and a negative amount is applied to your tax code.

Example: You underpaid £1,200 in 2024/25. HMRC adjusts your 2025/26 code from 1257L to 1137L (approximately), spreading the collection over 12 months at around £100 per month extra tax deducted.

This method is automatic and requires no action from you unless you disagree with the figure.

Method 2: Direct Payment

For amounts over £3,000, or where collection via code adjustment is not possible (e.g., you are no longer employed), HMRC will require direct payment. Methods include:

• Online banking via HMRC's online payment service
• Debit card payment via GOV.UK
• Bank transfer (HMRC's sort code and account number)
• CHAPS for same-day urgent payments
• Cheque by post (allow time for postal delivery)

BACS transfers typically clear within three working days. Always quote your Unique Taxpayer Reference (UTR) or National Insurance number as the payment reference.

Method 3: Through Self Assessment

If you are required to file a Self Assessment return (or voluntarily do so), the underpayment is calculated and collected through that process. Payment is due by 31 January following the end of the tax year.

Interest on Late Payment

HMRC charges interest on underpaid tax from the due date. The current HMRC late payment interest rate (set at Bank of England base rate + 2.5%) is approximately 7.25% for 2026 — a significant amount if a large liability has been outstanding for several years.

Interest is charged automatically and is not negotiable. However, interest does not apply to amounts being collected through tax code adjustment (HMRC treats these as spreading the original debt, not late payment).

If you believe the underpayment arose partly because of HMRC's own error (for example, an incorrect code applied despite correct information being supplied), you can apply for Extra Statutory Concession A19 — HMRC may waive the tax or part of it if they delayed using information that was available to them and it would now be inequitable to collect.

How to Check Your Tax Account on HMRC Online

Every taxpayer can access their Personal Tax Account at gov.uk/personal-tax-account using their Government Gateway credentials.

What you can see:

• Tax years and paid amounts for the last four years
• Current and previous tax codes with explanations
• Income sources HMRC holds on record (employer submissions, bank interest notifications, DWP data)
• P60 equivalents
• Any outstanding amounts or overpayments
• National Insurance record (useful for State Pension planning)

Checking for errors: Your Personal Tax Account shows what data HMRC holds. If an income figure looks wrong (e.g., a previous employer reported the wrong amount), this is where you will spot it. You can contact HMRC by phone (0300 200 3300) or via the online account to correct records.

What to Do If You Think the P800 Is Wrong

You have 60 days from the date of the P800 to query or dispute the figures. After 60 days, HMRC may treat the calculation as final and proceed to collect.

Steps to challenge:

1. Gather your evidence: P60s, payslips, bank interest statements, any relevant correspondence
2. Compare with HMRC's figures: Check each income source shown — is the amount correct? Is anything missing (e.g., pension contributions that should reduce taxable income)?
3. Contact HMRC: Use the Personal Tax Account message function (preferred — creates a written record) or call 0300 200 3300
4. Request a review: HMRC will review the calculation and confirm or amend it within 30–60 days typically

Common legitimate reasons to challenge:

• Employment income figure includes a lump sum payment (e.g., redundancy) that should be partially or wholly tax-free
• Pension contributions were not reflected in the income figure
• Marriage Allowance transfer was not applied
• Gift Aid donations were not included (these extend the basic rate band)
• Savings interest figure is incorrect or relates to a non-UK account

Scenarios Where PAYE Systematically Under-Collects

Understanding the systemic weaknesses helps you plan ahead and avoid surprises:

Key Takeaways

• P800 letters and Simple Assessment notices are common — they do not necessarily mean you have done anything wrong
• The most common causes are wrong tax codes, multiple income sources, savings interest above the PSA, and State Pension plus employment income
• Amounts under £3,000 are usually collected via tax code adjustment in the following year — no action needed unless you dispute the figures
• You have 60 days to query a P800 — act promptly if you think the figures are wrong
• Interest at ~7.25% applies to late-paid underpayments; ESC A19 may waive tax if HMRC's own delay contributed
• Check your Personal Tax Account online to see exactly what HMRC holds on record

Check your income tax position with our income tax calculator to ensure your PAYE deductions look correct, and use the take-home pay calculator to verify your current tax code is producing the right result.