Last updated: 16 October 2026
What is coding out?
If you are employed or receive a UK pension, HMRC can collect some tax you owe through your PAYE tax code instead of asking you to pay it in one lump sum. This is called coding out. It spreads the payment over the next tax year, with a little more tax taken from each payslip.
Coding out a Self Assessment balance
You can have a Self Assessment balancing payment collected through your tax code if:
- you owe less than £3,000
- you already pay tax through PAYE on a salary or pension
- you file your tax return online by 30 December (or on paper by 31 October)
- collecting it would not more than double your tax on that income or take more than 50% of your pay
The tax is collected in the next tax year. For example, if you file your 2025/26 return online by 30 December 2026 and owe £1,200, HMRC can collect it through your 2027/28 tax code. Payments on account cannot be coded out.
HMRC restricting your tax code to collect other debts
HMRC can also adjust your tax code to collect other debts, such as an underpayment from a previous year or certain overpaid benefits. It can collect more than £3,000 for higher earners, on a sliding scale up to £17,000 for people with PAYE income above £90,000. You will receive a tax code notice explaining the adjustment.
| Type of debt | Usual limit for coding out |
| Self Assessment balancing payment | Under £3,000 |
| PAYE underpayment from an earlier year (P800) | Varies; often collected over the following year |
| Other HMRC debts | Up to £17,000, depending on income |
Worked example
Nina is employed and has a small amount of rental income. She files her 2025/26 return online in November 2026 and owes £1,500. HMRC adjusts her 2027/28 tax code so her personal allowance in the code is reduced by £7,500 (£1,500 / 20%). About £125 a month extra tax is deducted through payroll over 2027/28. No interest is charged on the coded amount.
Can I opt out?
Yes. If you would rather pay the full amount by 31 January, tick the box on your tax return asking HMRC not to code out the tax. You can also pay the debt directly to clear it and ask HMRC to remove the adjustment.
Why your code may look strange
A coded-out debt reduces your allowance. In some cases, especially with several adjustments, your code can become very low or even a K code, which adds to your taxable pay. HMRC cannot take more than 50% of your pay in tax through a K code.
Frequently asked questions
Is interest charged on coded-out tax?
No, as long as HMRC collects it through your code as agreed.
What if I change jobs?
Your new employer uses the same code, so collection continues.
Can HMRC code out tax for the self-employed?
Only if they also have PAYE income.
What if the coding is wrong?
Contact HMRC with your tax code notice and explain the error.
Related: challenging a K code, negative PAYE coding notices and payments on account when tax is deducted at source.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with Self Assessment and tax code queries. See our Self Assessment tax return service service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
