Think being on payroll means your tax is all taken care of? Think again.

Many people assume that once they’re taxed through payroll, everything is taken care of. No tax return, no calculations, no surprises.

In practice, that assumption often proves wrong. We regularly speak to people who are fully on PAYE, have no other income, and still receive unexpected, and sometimes substantial, tax bills from HMRC.

So what causes this?

Payroll Only Works If Your Tax Code Is Right

PAYE relies entirely on your tax code.

HMRC normally issues tax codes using last year’s income, not what you expect to earn this year. That approach works when income stays steady. It breaks down when pay increases or bonuses come into play.

If your income rises and your tax code does not change, payroll continues to apply the wrong calculation.

A Common High-Income PAYE Scenario

We often see situations like this:

• Prior year income: £99,000
• Current year income (after pay rise or bonus): £130,000

HMRC may still issue a 1257L tax code, which gives you the full personal allowance through payroll.

Once your income exceeds £125,140, the personal allowance disappears entirely. Payroll does not automatically adjust for this unless HMRC updates the tax code.

The system keeps working, but it works with the wrong assumptions.

Why PAYE Can Still Leave You Underpaid on Tax

Many people understandably say:

"I’ve paid tax every month. How can it be wrong?"

Payroll does exactly what the tax code tells it to do. If the code is wrong, payroll applies the wrong tax for the entire year.

HMRC usually spots the issue later, once the tax year has ended and income figures are final. At that point, they calculate the shortfall and issue a bill.

That bill often comes as a shock, not because you did anything wrong, but because the system did not adjust quickly enough.

What You Can Do During the Tax Year

You are not powerless here.

If you expect your income to increase, you can:

• Review your tax code notice
• Contact HMRC and request an adjustment

That change allows tax to be collected gradually through payroll, instead of landing as a lump sum later.

Most people do not take this step because tax codes feel opaque and unfamiliar. Unfortunately, PAYE relies on that silence.

What Happens If the Tax Year Has Already Ended?

Your options depend on the size of the underpayment:

If the tax due is under £3,000

HMRC will often collect it through a future tax code. This spreads the cost across monthly pay, rather than requiring a single payment.

If the liability is larger

This often happens when the personal allowance is fully lost. In these cases, HMRC usually expects direct payment or a Time to Pay arrangement.

Either way, future take-home pay or cash flow takes a hit.

The Bigger Picture on PAYE and Tax Codes

PAYE creates the impression that tax 'just happens in the background'.

In reality, the system depends on estimates. When income changes, the risk shifts quietly onto you.

The reassurance is simple:

• These situations are common
• They are usually manageable
• They feel far less stressful when reviewed early

When your tax position is checked properly, you get clarity and confidence.

Contact LSR Partners today to speak with our expert team and pay the right tax, in the right place, at the right time.