Why HMRC put your PAYE payment against the wrong month

If you pay HMRC for a specific PAYE month and the money lands somewhere else, you have probably not done anything wrong. HMRC’s system generally applies payments against the oldest outstanding period on the account, regardless of which month you meant to pay.

That surprises most employers. It also explains the letters.

What is meant to happen

Your accounts office reference is 13 characters. When you pay, you add four more digits to tell HMRC which period the payment covers. The first two are the last two digits of the tax year. The last two are the tax month, 01 to 12, where month 1 runs from 6 April to 5 May.

A payment for month 3 of the 2026/27 tax year therefore ends in 2703.

Where the account is fully up to date, that usually works. The payment sits against month 3 and everyone moves on.

Where it goes wrong

If anything older is outstanding, the payment tends to be applied to that older period instead. The account then shows month 3 as underpaid, even though you paid it and referenced it correctly.

The effect is a rolling gap. You pay every month, on time, and the account still shows you a month behind. Chasing letters follow, and each one refers to a period you believe you have settled.

Employment allowance is a common trigger

Employment allowance is claimed through an EPS. If that claim goes in late, HMRC’s account shows the full liability for the earlier months while your payments are net of the allowance. The payments look short. When the claim is processed, the charges reduce and the payments you already made get moved around behind the scenes.

The same happens with any late or amended EPS: CIS deductions suffered, statutory payment recovery, or a correction to an earlier period. Every change moves the charges, and the payments move with them.

The letters do not tell you much

An underpayment notice gives you a period and an amount. It does not tell you which payment was moved, when it was moved, or why. Read on its own, it is close to useless.

To work out what actually happened, you have to rebuild the account: every charge by tax month, every payment by date and value, then match them. On an account with a few years of movement, that is a spreadsheet exercise rather than a five minute check.

What to do when one arrives

• Check before you pay. Interest runs on anything genuinely late, so do not sit on it. But paying a demand that turns out to be a reallocation just creates a credit you then have to chase.
• Pull the account. Employers can see charges and payments through their business tax account. Agents can see the same through the agent services account. Take it month by month rather than relying on the summary figure.
• Rebuild it. List the P32 liability for each tax month against what was actually paid and when. The gap will usually resolve to one of three things: a genuine shortfall, a late EPS, or a reallocation.
• Check the EPS history. A missing or late employment allowance claim explains a large share of these cases.
• Query it in writing if it is wrong. Set out the period, the payment date, the amount and the reference used. Keep the correspondence together, because these queries rarely resolve in one exchange.

How to reduce the chance of it happening

• Pay on time every month. Electronic payments clear by the 22nd, postal by the 19th.
• Submit the EPS in the same cycle as the FPS, not as an afterthought.
• Claim employment allowance at the start of the tax year rather than partway through.
• Reconcile the P32 to the HMRC account monthly. Doing it once a year turns a five minute check into a forensic exercise.
• If cash flow is going to be a problem, speak to HMRC before the due date rather than after the letters start.

The wider point

The allocation rule is not going to change. HMRC applies money to the oldest debt and the reference does not always override that. So the control has to sit at your end.

Monthly reconciliation is the whole answer. If you know what the account should say before HMRC tells you what it says, the letters become an administrative nuisance instead of a fortnight of unpicking.

How we handle it

We reconcile the P32 to the HMRC account as part of the monthly cycle for the payrolls we run, and we deal with the correspondence when the account does not agree. If you are working through underpayment letters for a client and the numbers will not reconcile, we are happy to talk it through.

Email support@intelligentpayroll.co.uk or call 0161 524 7696.

Minhaz Moosa, Director