Why HMRC Assumes Extra Income You Never Earned
- Adil Akhtar
- 1 hour ago
- 9 min read
Why HMRC Assumes Extra Income You Never Earned — A Deep, Practical Guide for UK Taxpayers (2026)
Let’s be honest — none of us likes unexpected tax bills or finding out that HMRC thinks we earned more than we did. Yet this situation is far more common than most people realise. In the 2023–24 tax year alone, more than 5.6 million UK taxpayers overpaid around £3.5 billion because HMRC assigned incorrect income assumptions via tax codes and PAYE deductions.
This article isn’t about easy soundbites — it’s about practical, professional insights you can act on today to check your tax positions, correct HMRC’s assumptions, and protect your take-home pay or business cash flow.
How HMRC Estimates Your Income
PAYE Is Based on Estimated Income
HMRC’s PAYE system doesn’t know your actual income until the tax year ends or until you tell it. Instead, it works from an estimated annual income, often calculated from prior payroll submissions or data received from employers, pensions, benefits, or returns.
If HMRC’s estimate is wrong — because it’s out of date, incomplete, or based on inaccurate reporting — your tax code may be set incorrectly, causing HMRC to assume you earn more (or less) than you do.
This is how mistakes happen even for straightforward employees.
Why HMRC Can Get It Wrong
1. Out-of-Date Employer Information
HMRC relies heavily on Real Time Information (RTI) submitted by employers. If an employer’s payroll information is delayed or incorrect, HMRC may assume your income has continued unchanged or treat past data as your current earnings.
Example: A former employer’s payroll mistakenly reported your final pay figure too high. HMRC then assumes you still earn at that rate and taxes you accordingly in your new job.
2. Benefits-in-Kind Still on Record
Company benefits (like cars, medical plans, gym memberships) are taxable. But if these benefits cease and HR doesn’t inform HMRC — or if HMRC doesn’t remove them from its records — you could be taxed as though you’re still receiving them.
This is a common issue for employees whose company benefits changed mid-year.
3. Multiple Jobs or Pensions
HMRC estimates income for each employment. If it thinks you hold two jobs (but you don’t), it may allocate your personal allowance incorrectly across those jobs or apply emergency or BR tax codes that tax income at higher rates without allowances.
For example, if HMRC thinks you have two incomes but you only have one, your allowance may be split between nonexistent earnings and real pay — or applied incorrectly — costing you money.
4. Emergency Tax Codes
Starting a job without sending a P45? HMRC often applies an emergency tax code (commonly ending in W1, M1 or X). These codes give only a weekly or monthly slice of your personal allowance rather than spreading it across the entire year — so tax withheld is typically too high.
This effect is temporary, but if the code stays in place for months, you essentially make HMRC an interest-free loan.
5. High-Income Child Benefit Charge (HICBC) Calculations
From 2025/26, PAYE has taken on administration of HICBC. HMRC now estimates your income for child benefit charge purposes, which often leads to over-deductions until the true year-end figure is known.
If your income fluctuates, you could see HMRC assume you earn more than you do — especially if bonuses or commissions are expected.
How Assumed Income Appears in Your Tax Code
Let’s break down how HMRC reflects income assumptions in your tax code:
Type of Code | Meaning | Why It Can Lead to Assumed Income |
1257L | Standard personal allowance | Good if accurate |
W1 / M1 / X | Emergency, non-cumulative | No year-to-date smoothing |
BR | Basic rate on all income | Often used for second job |
0T | No personal allowance | Assumed other allowance has been used |
D0 / D1 | Higher or additional rate coding | Assumes high annual income |
For many taxpayers, the issue isn’t the type of code — it’s why it was applied in the first place. HMRC may apply a code before it has complete or accurate information, and unless you correct that, it stays assumed.
The Real Story Behind Tax Overpayments
Recent data shows millions of UK taxpayers are routinely overpaying tax because of inaccurate HMRC assumptions.
Even more frustratingly, HMRC isn’t obliged to tell you that you’re on the wrong tax code. That responsibility lies with you, the taxpayer.
Practical Steps to Check Your Tax Code and Income Assumptions
Step 1: Review Your Personal Tax Account
The quickest and most authoritative source of truth is your HMRC personal tax account online or through the HMRC app. It shows:
● Estimated income for the current year
● All active tax codes
● Any non-coded income HMRC thinks you have
Compare this with your actual expectations for the year.
If estimated figures are higher than actual (e.g., HMRC assumes £60k but you expect £48k), it’s time to update.
Step 2: Update HMRC With Accurate Income Details
Use the "Tell HMRC about a change to your employment income" service to update:
● New job starts or finishes
● Overtime or variable pay expectations
● Freelance or casual income
● Rental or dividend income
HMRC will adjust your tax code and notify your employer or pension provider.
Step 3: Give HMRC Accurate Job Details
Ensure HMRC has your P45 from previous employers every time you change jobs. Without it, emergency tax codes or incorrect income estimates slip in.
If you started a job without a P45, submit a Starter Checklist accurately — and don’t tick Box A or B unless they apply. Mistakes here lead to wrong assumption codes (and possibly doubled allowances or underpayments later).
Special Situations Where Assumed Income Causes Big Problems - Freelancers, Contractors & Umbrella Employees
I’ve seen contractors taxed on £30,000+ more than they actually earned — all because the umbrella payroll submitted an incorrect income estimate and HMRC just assumed it was correct. Correcting this can involve:
● Asking employer to correct RTI submissions
● Updating HMRC directly via online services
● Potentially reclaiming overpaid tax for up to four years
This isn’t hypothetical — it’s a pattern I’ve repeatedly encountered in practice.
Multiple Jobholders
If you have more than one job, your personal allowance can only be used once. Yet HMRC sometimes allocates it incorrectly between jobs, leading to:
● Too much tax taken on one job
● Too little on another
● Estimated high total income that never existed
Always allocate your personal allowance to the correct job and use correct codes (BR/0T on others if appropriate).
Landlords, Directors & Business Owners with Mixed Income
HMRC may assume income from dividends or rental property if it has outdated information from prior returns or employer reports. You must proactively update HMRC:
● After selling a property
● If your rental income has fallen
● When dividends are lower than expected
If assumptions linger, your tax code will reflect higher total income.
What Happens If You Don’t Correct HMRC’s Assumed Income
Overpayment Persists
If HMRC’s estimated income is higher than actual — and you do nothing — you effectively lend HMRC money interest-free until the overpayment is corrected.
This happens to millions. And remember: HMRC isn’t obligated to alert you proactively.
Potential Unexpected Tax Bills
Conversely, if HMRC assumes less income than you actually expect, you could face a tax bill later when reconciliations occur (e.g., via P800 letters or Self Assessment). This often hits people who transition between PAYE and Self Assessment.
A Quick Checklist to Avoid Assumed Income Errors
✔ Check your tax code every single year in April–May
✔ Review your expected annual income with HMRC online
✔ Submit P45s & Starter Checklists accurately
✔ Update HMRC when income changes mid-year
✔ Allocate personal allowance correctly between jobs
✔ Monitor benefits-in-kind and pension changes
✔ Address emergency codes promptly
Summary of Key Insights
HMRC often estimates annual income based on incomplete or out-of-date information.
Tax codes are the mechanism through which HMRC reflects assumed income.
Emergency tax codes (W1/M1/X) frequently cause over-deductions.
Multiple jobs complicate allowance allocation and can trigger wrong tax codes.
Benefits-in-kind left on HMRC records lead to assumed income errors.
HMRC expects you to check and update your income estimates.
You can update estimated income via your HMRC online account or app.
Incorrect assumptions have led to £3.5bn in overpaid tax across millions of taxpayers.
Landlords and mixed-income earners must proactively report changes.
Using a simple annual checklist can prevent costly HMRC assumptions.
FAQs
Q1: Why does HMRC sometimes think someone still has a job they left months ago?
A1: Well, it’s worth noting that HMRC doesn’t know you’ve left a job unless the employer submits the final payroll correctly. In practice, I’ve seen employers forget to file a “leaver” indicator on the last FPS submission. HMRC then assumes the income continues and estimates a full year’s salary. The fix is usually simple: ask the former employer to correct the payroll record and update HMRC yourself online so the estimate is removed quickly rather than waiting for year-end.
Q2: Can HMRC assume income from a side hustle that never made a profit?
A2: Yes — and this catches people out. If you registered for Self Assessment because you planned a side business, HMRC may assume ongoing taxable income even if the venture stalled. I’ve seen clients taxed on “expected” freelance income that never materialised. The key is to either submit a nil return properly or formally deregister from Self Assessment so HMRC stops projecting income that doesn’t exist.
Q3: Why do PAYE estimates often go wrong after maternity or paternity leave?
A3: In my experience, HMRC often assumes pre-leave earnings continue unless payroll updates are crystal clear. Statutory maternity or paternity pay is lower, but HMRC’s systems may still annualise earlier higher pay. I’ve dealt with cases where this caused thousands in over-deducted tax mid-year. Always check your tax account when returning to work, especially if you switch from statutory pay back to salary.
Q4: Can bonuses or commissions make HMRC think someone earns more every year?
A4: Absolutely. One-off bonuses are a classic trigger. HMRC’s systems tend to annualise a large monthly payment as if it’s regular income. Picture a sales manager in Manchester receiving a £15,000 bonus in June — HMRC may briefly assume that level continues all year. The solution is to manually adjust your estimated income once the bonus is paid so the tax code reflects reality.
Q5: Why do contractors paid through umbrella companies face assumed income problems?
A5: Umbrella payrolls often submit figures that include reimbursed expenses or rolled-up elements. HMRC can misinterpret these as pure taxable earnings. I’ve seen contractors taxed as if they earned £10,000–£20,000 more than they actually took home. If you’re in this position, comparing payslips with HMRC’s income view is essential — discrepancies should be challenged early.
Q6: Can student loan deductions be wrong because of assumed income?
A6: Yes, and it’s more common than you’d expect. Student loan repayments under PAYE are triggered by estimated annual income. If HMRC believes you’ve crossed a repayment threshold due to incorrect assumptions, deductions start automatically. I’ve had clients repaying loans unnecessarily for months before spotting the error. Always check whether the income figure HMRC is using matches your real earnings.
Q7: Why does HMRC sometimes assume pension income hasn’t stopped?
A7: Pension providers don’t always update HMRC promptly when a small pension ends or is consolidated. HMRC may then assume it’s still paying out. I’ve dealt with retired clients being taxed on phantom pension income of £3,000–£5,000 a year. A quick call to the pension provider and an update to HMRC usually resolves it, but it rarely fixes itself automatically.
Q8: Can Scottish or Welsh taxpayers be affected differently by assumed income?
A8: Yes, particularly in Scotland. HMRC applies different income tax bands for Scottish taxpayers, so when income is wrongly estimated, the error is magnified by higher marginal rates. I’ve seen modest income errors translate into surprisingly large tax deductions. If you live in Scotland or Wales, always double-check that your residency status and income estimates both align correctly.
Q9: Why does HMRC sometimes assume rental income continues after a property is sold?
A9: Because HMRC often relies on prior Self Assessment data. If you sold a rental property but didn’t clearly report the cessation, HMRC may continue to code estimated rental profits into your tax code. I’ve seen landlords taxed on income from properties they no longer own. Updating HMRC’s “other income” section promptly after a sale is crucial.
Q10: Can directors be taxed on dividends that were planned but never declared?
A10: Yes — particularly owner-managed business directors. If previous returns showed regular dividends, HMRC may assume a similar pattern continues. I’ve dealt with directors who paused dividends during a tough trading year but were still taxed as if payments were made. In those cases, adjusting the estimated dividend income mid-year prevents unnecessary cash-flow strain.
About the Author:
Adil Akhtar, ACMA, CGMA, serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than three years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants, combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
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