The coding threshold entitles taxpayers to have an underpayment of less than £3,000 collected via their tax code, provided they are in employment or in receipt of a UK-based pension. The coding applies to certain debts such as Self Assessment liabilities and tax credit overpayments.

Since April 2014 outstanding Class 2 NIC contributions can also be collected via adjustments to PAYE tax codes. Class 2 National Insurance Contributions (NICs) are paid by all self-employed taxpayers unless they qualify for the small earnings exemption or other exemptions which remove the necessity to pay NICs. Taxpayers that have received an Annual Coding Notice (P2) and do not want their Class 2 NICs to be included in their tax code need to pay the amount due as soon as possible.

The increase in the coding threshold has helped more people with small debts and underpayments to benefit from this collection method. Instead of paying off debts in a lump sum, money is collected in monthly instalments over a year.

Taxpayers with underpayments in the tax year 2012-13 are paying back the amount owed to HMRC (up to £2,999) during the current tax year, which started on 6 April 2014.