Why does underpaid tax reduce tax due?

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I am viewing my self assessment calculation before submitting and I don't understand why the line "Underpaid tax for 2015-16 included in your tax code for 2016-17" appears under the section "minus Tax deducted".

According to the instructions, I have entered the £534 from my 2016-17 P2 as tax owed from an earlier year (2015-16) which has been a "Less Underpayment Restriction" of £1335 on my 2016-17 PAYE. I thought this would increase by £1335 the untaxed income increasing tax due, not reduce it!

Have I entered it incorrectly? Should it be entered as -534?

My wife thinks it is because the 2015-16 underpayment will continue to be taken out through the 2016-17 PAYE so HMRC are giving it back for 2015-16 recognising this amount carried over. This does make sense, but it is a guess as we have not been able to find confirmation of how it works.

I was expecting my 2015-16 tax due to increase by £534 followed by the elimination of the £1335 reduction to my 2016-17 PAYE.

Is the wife correct?

[Deleted User]

In short - your wife is correct.

Logically - why would HMRC collect an amount that you are already paying? HMRC are not giving it back - just ensuring that you are not paying it twice!

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Thank you. If you don't mind, what is the long version?

Logically, taking tax due for 2015-16 as part of my 2015-16 self assessment seemed more transparent to follow and reflective of reality rather than offsetting it in 2015-16 because I will pay it in 2016-17, spreading it over different years.

[Deleted User]

The long version is that HMRC , at some point, estimated that you would underpay in 2015/16 and decided to collect this estimate by reducing your code number in 2016/17.

It appears that they were correct in this assumption but, obviously, could not know the final figures (they would most likely hVe taken this action in January 2016).

Let's say your underpayment turns out to be £700.

1) January 2016 - HMRC estimate that you will be underpaid 2015/16 to the tune of £534. They decide to collect in 2016/17 as they would not be permitted to so do in 2015/16.

2) you submit your return and the underpayment is actually £700.

3) £534 is already being collected through PAYE in 2016/17. This is left alone and £166 is left payable.

4) you have the option of paying this by January 2017 or also paying this through PAYE in 2017/18 (interest free).

I know what I would be doing.

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[Deleted User] wrote:

The long version is that HMRC , at some point, estimated that you would underpay in 2015/16 and decided to collect this estimate by reducing your code number in 2016/17.

It appears that they were correct in this assumption but, obviously, could not know the final figures (they would most likely hVe taken this action in January 2016).

Except, they were not correct. My tax calculation shows I have overpaid tax for 2015-16 and would still have overpaid had they collected the 534 in 2015-16. So, I don't understand how you come to this conclusion. About what exactly are they correct?

In previous years, these small adjustments would be handled in the relevant year through self assessment. After my 2014-15 self assessment which had a one time increase on a new type of income compared to previous years, my 2015-16 code was changed assuming same would continue but because this was done late in 2015 as I only submitted the 2014-15 assessment in December they then decide to instead carry over to 2016-17. Now that I do my 2015-16 assessment, it is clear that 2014-15 line is not repeating although my 2016-7 code, 2 years later, still expects it.

I see the logic, but it doesn't seem very logical. It is not such a huge amount that would have merited such a 'hold' on my 2016-17 PAYE, I would have thought they could just wait for my 2015-16 self assessment. All the more strange, if as you suggest, any amount due could be put off to the 2017-18 PAYE so what was the urgency?

[Deleted User]

'Correct' was based on my assumption that your underpayment was £700 (you provided no details). It was a genuine effort to explain the process as you had asked for a further explanation. Despite this you now appear to more knowledgable than I and I will leave you to it.

One point - HMRC could have waited until your 2015/16 assessment but this could have been as distant as 31 January 2017- not much room for manoeuvre there!

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Thank you, I am not more knowledgeable! I was just trying to work through the logic as it seems counter intuitive. I follow what you're saying, it is just odd to me HMRC was in a hurry to apply this in my 2016-17 code rather than wait until 31/1/17 latest for my 2015-16 self assessment given they then offer the flexibility of deferring payment to 17-18 PAYE as you suggest which would drag this on even further only starting April 2017. I think if it was a big amount I could understand this route, but for something trivial it seems overly complicated for what is involved. I suppose they don't have limits on when to take such action.

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I should add I was not trying to be confrontational or ungrateful if that is how it came across.

Also, thinking about how this could have been prevented, I wonder what would have happened had I contacted them when they sent me my adjusted 2016-17 code. Would they have agreed to remove the underpayment line? In terms of timing, it would have been difficult, I only received the amended 2016-17 code in March, I doubt they would have corrected in time before April.

dori2o

expansion wrote: »

I should add I was not trying to be confrontational or ungrateful if that is how it came across.

Also, thinking about how this could have been prevented, I wonder what would have happened had I contacted them when they sent me my adjusted 2016-17 code. Would they have agreed to remove the underpayment line? In terms of timing, it would have been difficult, I only received the amended 2016-17 code in March, I doubt they would have corrected in time before April.

are you sure the underpayment restriction in the 16/17 tax code is in respect of tax due for 15/16?

If you have been in self assessment for a number of years then you would normally see a restriction for 14/15 in the 16/17 code. This is because you fill in the 14/15 tax return during the 15/16 tax year and the underpayment for 14/15 would then be collected from the beginning of the next available tax year which would be 16/17.

If this is your first year in SA then it is possible the PAYE and Self Assessment systems were not linked and a potential underpayment was calculated following a tax code change in 2015/16 which carried over to be collected in 16/17.

It is not normal for potential underpayments to be carried forward to the next tax year where the taxpayer is in Self Assessment, you would usually only see actual underpayments included in the tax code based on the previosly submitted Self Assessment form (assuming it was submitted/processed on or before 30 December)