The legislation that will enable a significant increase in the coding threshold for taxpayers to have an underpayment collected via their tax code, came into effect on 1 November 2014. From 2015-16 the coding out limit will increase from £3,000 to £17,000 based on a graduated scale. The maximum coding out allowance will only apply to taxpayers with earnings exceeding £90,000.

The coding applies to certain debts such as Self Assessment liabilities and tax credit overpayments. Instead of paying off debts in a lump sum, money is collected in monthly instalments over a year. Where a taxpayer receives PAYE income and completes a Self Assessment return, HMRC can collect any money due from the previous year using the taxpayer's PAYE code.

The monies will be collected automatically providing that the taxpayer does not object and that the taxpayer's Self Assessment return is filed by 30 December. i.e. for the 2013-14 tax year the deadline to file a Self Assessment return is 30 December 2014 (the normal deadline for electronic returns is 31 January 2015). This would enable the 2013-14 underpayment to be collected by an adjustment to the PAYE code during 2015-16. The various, proposed coding out limits are reproduced below:

Earnings              Coding out limit
Less than £30k      £3k
£30k to £40k        £5k
£40k to £50k        £7k
£50k to £60k        £9k
£60k to £70k        £11k
£70k to £80k        £13k
£80k to £90k        £15k
£90k or more       £17k