The Tax Office has written to me saying £2,800 tax I owe will be collected by restricting my PAYE code for 2012/13. What does this mean?
The Taxman is now permitted to collect up to £3,000 of the unpaid tax or overpaid tax credits through PAYE codes. Your PAYE code tells your employer how much of your income to treat as tax-free, and thus how much tax to deduct from the rest. A common PAYE code for 2011/12 would be 747L, which gives you a tax-free income of £7,475 for the year. If you owe £2,800 in unpaid tax, and your highest marginal tax rate is 40%, your tax-free income will be reduced by £7,000 (£2,800/ 40%), leaving you with a tax-free income of £475 and a PAYE code of 47L. The numbers will be slightly different in 2012/13, but essentially you will pay more tax each month from April 2012 until the tax debt is eliminated.