Coding out means HMRC reduces your PAYE tax code so that your employer or pension provider collects tax you owe through your pay. A PAYE underpayment or a Self Assessment balance can be coded out only if it is under £3,000, while other HMRC debts can be collected on a sliding scale of up to £17,000 a year depending on your PAYE income. You can opt out of Self Assessment coding on your return and can pay a P800 underpayment directly instead.

What can HMRC collect through a tax code?

Section 684 of the Income Tax (Earnings and Pensions) Act 2003 lets PAYE regulations provide for several different kinds of collection through the code, and they follow different rules:

What is owed Limit Can you object?
PAYE underpayment from an earlier year, usually shown on a P800 Under £3,000 Yes, you can pay directly instead
Self Assessment balancing payment Under £3,000, and the return must be filed on time for coding Yes, by ticking a box on the return
Tax for the current year on untaxed income such as savings, property income or casual earnings Not normally if that income is over £10,000 Yes, by ticking a box on the return
Other debts passed by HMRC Debt Management, such as older Self Assessment debts and penalties Graduated scale up to £17,000 a year Not below the statutory ceiling
Tax credit overpayments and the High Income Child Benefit Charge Tax credit debts count towards the graduated scale Yes, collected only if you do not object

HMRC also adds In Year Adjustments to a code to collect extra tax for the current year after a change in circumstances. These sit outside the £2,999.99 limit for underpayments, so in some cases more than £3,000 can end up in a code (PAYE Manual PAYE90025).

What are the limits?

For PAYE underpayments and Self Assessment balancing payments, the limit is £3,000. HMRC’s manuals say only amounts up to £2,999.99 can be coded, and the graduated scale does not apply to them (PAYE90025 and DMBM618010).

For other debts, regulation 14D of the Income Tax (PAYE) Regulations 2003 sets out Table 1A, based on your expected PAYE income for the year in which the code operates:

Expected PAYE income Maximum debt recovered in the year
Less than £30,000 £3,000
£30,000 to under £40,000 £5,000
£40,000 to under £50,000 £7,000
£50,000 to under £60,000 £9,000
£60,000 to under £70,000 £11,000
£70,000 to under £80,000 £13,000
£80,000 to under £90,000 £15,000
£90,000 or more £17,000

Section 684(3A) ITEPA 2003 prevents deductions of more than £17,000 a year for these debts without your consent. HMRC can split a debt so part is coded and the rest is pursued another way. Its own example (PAYE14010) is a £4,000 tax credit debt and income of £29,000: £2,999.99 goes into the code and the rest goes back to Debt Management. Since 4 March 2020, Self Assessment debts can be coded over 2 tax years (SAM141045).

Other restrictions

Even within those limits, GOV.UK says a Self Assessment bill cannot be paid through your code if you do not have enough PAYE income, if you would pay more than 50% of your PAYE income in tax, or if you would end up paying more than twice as much tax as you normally do. Self employed Class 2 National Insurance cannot be coded unless it has been due since before 6 April 2015.

How does Self Assessment coding out work?

You can pay a Self Assessment bill through your PAYE code if all of these apply:

  • you owe less than £3,000;
  • you already pay tax through PAYE as an employee or pensioner;
  • you filed a paper return by 31 October or an online return by 30 December.

If you owed £3,000 or more and made a part payment to bring it under £3,000, you cannot use this route. For the 2025 to 2026 return, the SA150 notes say HMRC will collect the balance from 6 April 2027 if the paper return arrives by 31 October 2026 or the online return is filed by 30 December 2026. Coding happens automatically unless you opt out. The amount collected later shows on your SA302 tax calculation, which separates the PAYE tax deducted from the coded debt collected (SAM141045).

Illustration only. Jo, an employee who also has a small rental income, files her 2025 to 2026 return online on 12 December 2026 showing £1,200 to pay. As she owes less than £3,000 and filed before 30 December, HMRC adjusts her 2027 to 2028 tax code, so about £100 more tax is taken each month from April 2027 instead of £1,200 being due on 31 January 2027. Had she filed on 15 January 2027, the whole £1,200 would have been due by 31 January.

Is interest charged on coded debts?

Regulation 14A(4) treats amounts deducted for a relevant debt as paid on the first day of the tax year for which the code is set. HMRC’s Self Assessment Manual (SAM141045) says interest on Self Assessment debts that Debt Management passes for coding runs from the original due dates until that effective date. Its example is a 2010 to 2011 balancing charge coded and collected in 2014 to 2015, where interest runs from 31 January 2012 to 6 April 2014. Coding a debt that is already overdue does not wipe out late payment interest that has already built up.

How do you opt out?

  • Self Assessment balance. On the SA100, in the section headed “If you have not paid enough tax”, put X in box 2 if you do not want HMRC to code out what you owe. You then pay by 31 January in the usual way.
  • Current year tax on untaxed income. Put X in box 3 if you would rather pay tax on savings, property income, casual earnings or the High Income Child Benefit Charge through Self Assessment. For the 2026 to 2027 year, that tax is then due by 31 January 2028.
  • P800 underpayment. Section 684 allows deductions for earlier year underpayments only if and to the extent that you do not object. GOV.UK says you can pay before the start of the following tax year, and HMRC sets a direct payment against the coded amount (PAYE90010).
  • Debts sent by Debt Management. These are collected on a mandatory basis within the statutory limits (DMBM618010). Tax credit debts are the exception: regulation 14C allows them to be coded only if you do not object. If you pay off a coded Self Assessment debt directly, HMRC’s coding out team amends the remission and the code (SAM141045).

What happens if your job or pension changes?

If your income changes during the year, HMRC reruns the coding check. It works out how much of the debt can still be collected and either carries the rest into the next year’s code or returns it to Debt Management (PAYE14010). When you leave a job, a coded debt stays in the code (PAYE94060), and it is taken into account in any in year repayment claim, as explained in our guide to claiming tax back after leaving a job.

At the end of the year HMRC works out how much was actually collected. For Self Assessment debts, only that amount is credited to your Self Assessment account (SAM141045). An underpayment found at reconciliation that cannot be coded is collected by Simple Assessment, as explained in our P800 guide.

When several amounts compete for space in a code, PAYE14010 sets the order of priority: PAYE in year adjustments first, then PAYE underpayments, then Self Assessment balancing payments, then debts transferred from Debt Management.

What mistakes do people make?

  • Filing online in January and expecting the balance to be coded. The 30 December deadline is strict.
  • Making a part payment to get under £3,000, which rules out coding.
  • Paying directly but leaving the amount in the code, then not checking the next coding notice.
  • Assuming Class 2 National Insurance will be coded with the tax; it must be paid by 31 January.
  • Treating coding as a way to defer overdue debts without interest, or as a substitute for a Time to Pay arrangement when the amount is above the limit.

To read the resulting code, see our guide to PAYE tax codes.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.