Receiving a letter saying you owe HMRC money is stressful — especially when you thought your tax was sorted through PAYE. This guide explains why you might owe tax and what to do about it.
How HMRC Knows You Owe Money
HMRC collects data from:
- Your employer(s) — Real Time Information (RTI) payroll
- Pension providers
- Banks and building societies (savings interest)
- DWP (benefits)
- Your Self Assessment returns
- Company records (benefits in kind)
After each tax year, they compare what was deducted vs what should have been paid. If you underpaid, you’ll hear about it.
Common Reasons You Owe Tax
1. Wrong Tax Code All Year
If your tax code was incorrect:
- Too much allowance given → underpaid tax
- Benefits in kind not included → underpaid
- Second job allowance doubled → underpaid
Example: You had 1257L on two jobs simultaneously. That’s £25,140 allowance given when you only qualify for £12,570. You’ll owe tax on the extra £12,570.
2. Multiple Income Sources
Having several jobs or income sources creates complexity:
| Situation | Problem |
|---|---|
| Two jobs | Allowance might be split incorrectly |
| Pension + job | Pension might not deduct enough tax |
| Job + rental income | Employment tax code doesn’t cover rental |
| Job + dividends | Dividends over £500 allowance are taxable |
| Job + savings interest | Interest over Personal Savings Allowance is taxable |
3. State Pension Underpayment
State Pension is taxable but no tax is deducted at source:
- If you have a job, your tax code is adjusted to collect it
- If the adjustment is wrong, you underpay
- If you only have State Pension (and it’s below Personal Allowance), no tax due
Common issue: Started receiving State Pension mid-year and tax code wasn’t updated.
4. Benefits in Kind (Company Car, Medical)
Taxable benefits should reduce your tax code:
| Benefit | Impact |
|---|---|
| Company car | £2,000-£10,000+ added to taxable income |
| Private medical insurance | £500-£2,000 added |
| Fuel for personal use | Significant addition |
| Interest-free loans over £10,000 | Taxable benefit |
If these weren’t included in your tax code, you’ll owe the tax.
5. Self Assessment Not Filed/Paid
If you should have filed Self Assessment:
- Rental income (over £1,000)
- Self-employment income
- Capital gains over allowance
- High Income Child Benefit Charge
- £100,000+ income
And you didn’t file — HMRC will estimate your tax and bill you.
6. High Income Child Benefit Charge (HICBC)
If you earn over £60,000 and claim Child Benefit:
- You must repay 1% of benefit for every £200 over £60,000
- At £80,000+ income, you repay it all
- Must be declared via Self Assessment
If you didn’t know about HICBC, you’ll owe years of tax.
7. Previous Years’ Underpayments
HMRC can:
- Discover underpayments from previous years
- Go back 4 years normally
- Go back 20 years if deliberate underreporting
Old tax codes, job changes, or pension interactions can surface years later.
8. Savings Interest Over Your Allowance
Interest over your Personal Savings Allowance is taxable:
- Basic rate taxpayers: £1,000 allowance
- Higher rate taxpayers: £500 allowance
- Additional rate taxpayers: £0 allowance
Banks report interest to HMRC. If you exceed the allowance, you’ll owe tax.
9. Dividend Income Over £500
In 2026/27, dividends over £500/year are taxable:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
Your employer doesn’t know about dividends, so PAYE doesn’t collect this tax.
10. Employer Payroll Errors
Occasionally, employers make mistakes:
- Didn’t implement tax code correctly
- Submitted wrong figures to HMRC
- NI calculated incorrectly
If the error is your employer’s fault, HMRC should pursue them, not you — but you may need to dispute it.
How HMRC Tells You
P800 Letter
Sent after the tax year ends (usually May-October), showing:
- Your total income from all sources
- Tax already paid
- Tax that should have been paid
- Amount owed (or refund due)
Personal Tax Account
Log in to see:
- Current year tax code
- Previous year calculations
- Amounts owed/owed to you
Simple Assessment Letter
Replaces Self Assessment for some people:
- HMRC calculates your tax
- Sends you a bill
- No need to file return
Self Assessment Bill
If you file Self Assessment, your tax calculation shows:
- Tax due by 31 January
- Payments on Account due (if applicable)
What to Do If You Owe HMRC
Step 1: Check the Figures
Log into your Personal Tax Account at gov.uk/personal-tax-account.
Review:
- Income figures — do they match your P60s?
- Employment dates — are they correct?
- Benefits in kind — do P11D figures match?
- Tax already paid — does it match payslips?
Step 2: Dispute If Wrong
If figures are incorrect:
- Gather evidence (P60s, payslips, P11D)
- Contact HMRC via Personal Tax Account or 0300 200 3300
- Explain the error with supporting documents
- Request correction
Step 3: Check for ESC A19 Relief
Extra-Statutory Concession A19 may write off your debt if:
- HMRC failed to use information they already had
- You had no reason to know you’d underpaid
- HMRC’s error, not yours
This particularly applies to PAYE discrepancies where HMRC had RTI data.
Step 4: Pay If Correct
If the amount is correct, you can pay:
- Online: Through Personal Tax Account
- Tax code adjustment: HMRC spreads recovery over next year’s salary
- BACS/Faster Payment: Using HMRC payment references
- Direct Debit: Set up at gov.uk
Step 5: Request Time to Pay If Struggling
If you can’t afford to pay in full:
- Call HMRC Self Assessment Payment Helpline: 0300 200 3822
- Explain your circumstances honestly
- Propose a payment plan you can afford
- HMRC may agree to monthly instalments
Time to Pay can spread debt over 12+ months.
How HMRC Collects the Debt
Collection via Tax Code
For debts under £3,000, HMRC often collects through your tax code:
- Reduces your allowance
- More tax taken from each payslip
- Spread over 12 months
Example: £1,200 owed → Code reduced by 120 (1257L becomes 1137L)
Direct Payment Required
For larger debts or Self Assessment:
- Payment deadline on the letter
- Interest accrues if you miss deadlines
- Penalties may apply
Debt Collection
If you ignore HMRC:
- Reminder letters
- Formal demand
- Debt collection agency
- County Court Judgment
- Bailiffs (extreme cases)
Never ignore HMRC letters — it gets worse.
If You Can’t Pay
Time to Pay Arrangement
Contact HMRC before the deadline to arrange instalments:
- Self Assessment debts: 0300 200 3822
- PAYE debts: 0300 200 3300
Be honest about what you can afford.
Hardship Relief
In extreme circumstances, HMRC may:
- Write off debt (very rare)
- Pause collection
- Accept reduced payment
You’ll need to demonstrate genuine hardship with evidence.
Get Debt Advice
Free help available from:
- Citizens Advice: citizensadvice.org.uk
- StepChange: stepchange.org
- National Debtline: nationaldebtline.org
HMRC debt is a priority debt — they have strong collection powers.
Preventing Future Underpayments
Check Your Tax Code Annually
Log into Personal Tax Account and verify:
- Correct employment details
- Benefits in kind included
- No double allowances
- State Pension accounted for
Submit Self Assessment If Required
You must file Self Assessment if:
- Self-employed income over £1,000
- Rental income over £1,000
- Earn over £100,000
- High Income Child Benefit Charge applies
- Untaxed income over allowances
- Capital gains over allowance
Register by 5 October following the tax year.
Tell HMRC About Changes
Update HMRC when you:
- Start/stop receiving pension
- Get new taxable benefits
- Have additional income sources
- Change jobs mid-year
Related Guides
- Why Has My Tax Code Changed? — Understanding tax codes
- Self Assessment Guide — How to file
- High Income Child Benefit Charge — HICBC explained
- Tax on Savings Interest — Personal Savings Allowance
- Dividend Tax Guide — Tax on dividends
If HMRC says you owe money, check the figures carefully. Dispute errors with evidence, but if the debt is correct, pay promptly or arrange time to pay. Ignoring HMRC makes things worse — interest, penalties, and enforcement action will follow.