From April 2012 HMRC will be able to collect debts up to the value of £2999.99 by amending the tax code of individuals in PAYE employment or receiving a UK-based pension.
HMRC have begun to issue letters to individuals who fall into the selected criteria.
HMRC began sending letters to selected self assessment debtors from August 2011, and to tax credit claimants with outstanding overpayments from early October. The letter explained that their debts or overpayments may be collected by tax code adjustment from April 2012 and gave them a final chance to either pay in full or contact us to discuss other payment options.
The first PAYE coding notices to include these changes will be issued from January 2012. A self assessment debt or tax credit overpayment will be described on the P2 Annual Coding Notice as “Outstanding debt” with a note to say whether this is self assessment tax, a tax credit overpayment or both.
Interest will continue to accrue on the outstanding debt. HMRC will write asking for payment of any interest charges at a later date, once the liability has been settled. HMRC do not charge interest on tax credit overpayments.
HMRC will not change tax codes in year to recover these debts or overpayments. They will always be included in the code issued for the start of the tax year, and will only be amended if there is a change in circumstances.
Safeguards already exist to prevent excessive deductions from salary via PAYE and these will apply to HMRC's ability to code out such debts.