Why PAYE overcharging by HMRC is every contractor’s problem

There's an unfortunate impression doing the rounds that limited company IT contractors aren't affected by HMRC's PAYE issues, including its rampant overcharging, writes Carolyn Walsh, a former inspector of taxes and now the managing director of Oblako Ltd.

'Why PAYE overcharging by HMRC is every contractor's problem'

I'm sympathetic because the thing is, this 'not me guv' attitude on PAYE from limited company contractors is technically correct because, for tax-efficiency purposes, 'limited' contractors usually pay themselves a salary that is covered by the personal allowance (£12,570) and NI thresholds, with the effect that they personally pay no PAYE.

But show me a limited company IT contractor who hasn't had to accept a PAYE umbrella contract in the last 12-18+months, potentially just to keep the lights of their limited company on, or in a bid to keep their skills fresh!

'The inside-outside IR35 overpayers to HMRC'

Moreover, limited company contractors pay income tax on dividends, and this tax liability is ever-increasing. In fact, dividend tax rates will increase from April 6th 2026, with the basic rate rising to 10.75%, higher to 35.75%, and the additional rate still a hefty 39.75%. At the same time, limited company contractors operating inside IR35, either in a direct contract with a hirer or via an umbrella company, see the tax-efficiency of a low salary/higher dividend model completely cancelled out.  

As mentioned at the top, HMRC has been found sitting on billions in overpaid tax — around £8.9 billion from self-assessment alone.

And that overpayment has hit workers in their millions, including contractors whose online Personal Tax Accounts show errors, such as incorrect tax codes or unclaimed refunds despite high PAYE deductions under IR35. 

'Look at your HMRC Personal Tax Account in the same vein as take-home pay and efficiency optimisation'

Therefore, I can't emphasise the following enough. All contractors, especially limited company directors, and those paid via umbrella companies, should be checking their .gov Personal Tax Account as a matter of course, ideally quarterly, to spot and resolve potential issues in real-time. 

I would regard using HMRC's Personal Tax Account website as a bolt-on to the 'efficiency drive' and 'closer monitoring of expenses entitlement' which I see accountants are advising contractors to undertake. With the feeling that the tax walls are closing in on company directors, ahead of 2026/27 commencing on April 6th, these three are all grist to the mill.

'What should I look out for when using my online Personal Tax Account?' 

So let's get to what contractors should keep a lookout for when logging onto their Personal Tax Account (PTA).

First, contractors could see HMRC adding 'Uncoded income', which has the effect of reducing their personal allowance. So the £12,570 tax-free threshold every taxpayer gets may be tapered or withdrawn if HMRC believes tax is owed, including on dividends, whether they are paid or not.

At the time of writing, I'm seeing contractor limited company directors being advised to limit their salary to the personal allowance to minimise NI. But this reduces tax/NI-free income, while increasing dividend payments, which are taxed at those higher rates (10.75% for basic rate taxpayers and upwards).

So that's not advice I'd advocate, unless you want to boost your overall HMRC liability. 

'Key HMRC phrases contractors won't want to see on their personal tax account'

In cases where IR35 is in play, where nearly all turnover is treated as employment income with full PAYE/NI deducted, directly or via an umbrella, HMRC might still flag 'Owed Tax' from expected PSC dividends or past adjustments, triggering personal allowance reductions.

What about if you're employed by a proactive, rule-abiding umbrella company?

Well, even the most front-footed umbrella employer won't investigate a current staffer's/ former director's reduced personal allowance; it's not their responsibility. Oh, and HMRC won't recognise that there is an issue either.

The onus is on the taxpayer.

Logging into the .gov Personal Tax Account could reveal HMRC has added fictitious 'Uncoded Income', perhaps anticipating undeclared dividends when the reality is PAYE-paid employment income under IR35. This would lead to over-deductions at source, with any refund held by HMRC — until the taxpayer does something about it. 

'What does a .gov Personal Tax Account show taxpayers?' 

Everyone, including limited company directors (also known as Personal Service Company directors), can sign into their free Personal Tax Account via GOV.UK, using a Government Gateway ID.

You can set up such an ID with your NI number, email address, and photo ID.

With access to your PTA, you can see income tax estimates, PAYE records from the company/umbrellas/IR35, Self-Assessment balances, tax codes, and overpayments over five years.

'Personal Tax Account: four key checks for all contractors to run'

1. Review your current tax code — aim for '1257L' unless legitimately adjusted.  
2. Check personal allowance status and for any 'Adjustments for Tax Owed'.  
3. Real-time PAYE vs. expected dividends — look out for 'Uncoded' entries. 
4. Keep abreast of Payments on Account from Self-Assessment.  

'Spotting and fixing errors in real-time' 

Using their PTA, contractors can make decisions based on real-time information.

Any errors, such as fictitious 'Uncoded Income', can be changed or removed online. And other issues can be challenged online via the account — just select 'Manage Your tax', then 'Dispute Adjustments,' and then upload your payslips or P60s with the result of removing any uncoded income, thereby restoring your personal allowance.

Helpfully, if an umbrella company isn't compliant (e.g. wrong PAYE calculations, NI categories or missing RTI), it's obvious on your PTA too. Such red flags might prevent headaches like HMRC enquiries or penalties later down the line. 

'Personal Tax Account (PTA): why it pays to PTA'

Proactively monitoring your Personal Tax Account empowers individuals to potentially reclaim thousands in wrongly charged tax from HMRC, and for contractors, it can even help avoid IR35 pitfalls.

That said, with IR35 specifically, I would urge any contractor with off-payroll working tax issues to consult a specialist accountant and obtain tailored IR35 advice. 

'Beware 'Refund Specialists''

However, please be aware that there are certain operators out there claiming to be 'refund specialists,' able to reunite you with that take-home which got overcharged by HMRC. Some refund specialists will not do much more than land you in a truly special mess.

'Final checks/considerations for contractors using Personal Tax Account'

To get your hands on your chunk of the billions overcharged by HMRC but unclaimed back, here are some final checks and considerations that contractors can run using the .gov Personal Tax Account.

• Are you an inside IR35 contractor? You may qualify for repayment due to PAYE over-deductions or unadjusted allowances. 
• Outside IR35 contractor, inside IR35 contractor, or PAYE contractor? Download statements from your Personal Tax Account.  
• Cross-check your PTA statement against payslips/P45s/limited company bank account.  
• Noticed discrepancies from the cross-check? Amend Self-Assessment or claim relief online.
• Expect refunds within 6-12 weeks; interest applies after 12 months.  
• For umbrella company contractors, request full breakdowns every tax year, so very soon — April 6th 2026!