You Discovered a PAYE Overpayment. Now What?

You processed payroll for the 2024/25 tax year. You submitted the Full Payment Submission (FPS) to HMRC. Then you spotted it: you overpaid PAYE on one of your employees. Maybe you applied the wrong tax code. Maybe you miscalculated their earnings. Maybe a new starter gave you the wrong starter declaration.

Whatever the cause, the result is the same. You paid HMRC more PAYE than you should have. The money is sitting on your HMRC account. You want it back.

Correcting a PAYE overpayment from a previous tax year is straightforward if you follow the right process. This guide explains exactly how to correct PAYE overpayment HMRC will accept, whether you use Real Time Information (RTI) corrections or claim a direct repayment.

First: Check the Tax Year

The correction process depends on which tax year the overpayment occurred in. HMRC splits this into two categories:

  • Same tax year (still open for RTI corrections)
  • Previous tax year (the year has closed and you cannot simply resubmit payroll data)

For 2025/26 purposes, the 2024/25 tax year ended on 5 April 2025. If you overpaid PAYE in that year and it is now after 5 April 2025, you are dealing with a closed year. The same applies to any earlier tax year.

If you are still within the current tax year, you can usually correct the overpayment through your next payroll run using an FPS. That is the simplest route. But if the year has closed, you need a different approach.

How to Correct PAYE Overpayment HMRC Will Accept: The EPS Route

For overpayments in a closed tax year, the standard correction method is the Employer Payment Summary (EPS). The EPS is a monthly or quarterly return that tells HMRC about adjustments, reductions, and recoveries. You submit it alongside or instead of your FPS.

Here is the process:

  1. Calculate the exact overpaid amount. Work out what you actually paid versus what you should have paid. Include employer National Insurance if that was also overpaid.
  2. Identify the employee. You need their full name, National Insurance number, and the tax year of the overpayment.
  3. Submit an EPS for the current tax year. On the EPS, you report the overpayment as a "recovery of amounts previously paid" or "earlier year adjustment." Most payroll software handles this automatically. In Xero, for example, you enter a negative figure in the "Earlier Year Adjustment" field. In FreeAgent, you use the "PAYE corrections" section. In Sage 50, you post a manual adjustment against the employee's YTD figures.
  4. HMRC adjusts your account. Once HMRC processes the EPS, they reduce your current year PAYE liability by the overpaid amount. You effectively reclaim the overpayment against future PAYE bills.

This is the most common method to correct PAYE overpayment HMRC processes without fuss. It works because HMRC reconciles your account across tax years. They prefer you to offset rather than ask for a cash refund.

When the EPS Does Not Work: Direct Repayment Claims

There are situations where the EPS method is not suitable. For example:

  • You have ceased trading and have no future PAYE bills to offset against
  • The overpayment is large and you need the cash back quickly
  • You have already closed your PAYE scheme
  • The EPS adjustment would create a negative liability that HMRC cannot process

In these cases, you claim a direct repayment from HMRC. You do this by writing to HMRC's PAYE Employer Helpline (0300 200 3200) or using your online HMRC account. You need to provide:

  • Your employer PAYE reference
  • The tax year of the overpayment
  • The employee's details
  • The amount overpaid, broken down by tax and National Insurance
  • An explanation of what went wrong

HMRC will review the claim. If approved, they issue a repayment directly to your business bank account. This typically takes 2 to 4 weeks but can take longer if the amount is large or the error is complex.

What If the Overpayment Affects the Employee's Tax Position?

Sometimes the overpayment means the employee paid too much tax as well. For example, if you overpaid their tax code or over-deducted PAYE from their wages, the employee has also overpaid.

In that case, you need to correct the employee's tax position too. You have two options:

  • Repay the employee directly and reclaim the overpaid PAYE from HMRC via EPS or direct claim
  • Leave HMRC to refund the employee through their self assessment or tax code adjustment

If you repay the employee, you must do so within the current tax year. You then reclaim the PAYE from HMRC. If you do not repay the employee, HMRC will eventually refund them, but it may take months or years depending on their tax affairs.

For directors of limited companies, this situation is less common because most directors are also shareholders and can adjust their dividend and salary mix. But it still happens.

Common Mistakes When Correcting PAYE Overpayments

We see the same errors repeatedly when clients try to correct PAYE overpayment HMRC records. Here are the ones to avoid:

  • Submitting a corrected FPS for a closed year. HMRC will reject it. Use the EPS for closed years.
  • Failing to include employer NI. If you overpaid PAYE, you probably overpaid employer Class 1 NI at 13.8% as well. Claim that back too.
  • Not keeping records. HMRC can ask for evidence of the error and the correction. Keep your payroll reports, the original FPS, the EPS, and any correspondence.
  • Assuming the employee will sort it out. They might not. And if HMRC reconciles their tax account and finds a mismatch, you could face a compliance check.
  • Ignoring the overpayment. Some employers hope it will sort itself out. It will not. The longer you leave it, the harder it becomes to prove the error.

Time Limits for Correcting PAYE Overpayments

HMRC allows you to correct PAYE overpayments going back up to 4 years from the end of the tax year in which the overpayment occurred. For the 2024/25 tax year, you have until 5 April 2029 to submit a correction. For 2023/24, you have until 5 April 2028.

After 4 years, HMRC will not accept the correction. The overpayment becomes a permanent loss to your business. So do not delay.

If the overpayment is from 2020/21 or earlier, check the date now. You may already be outside the time limit.

What About Penalties?

Correcting a genuine error does not automatically trigger a penalty. HMRC distinguishes between an honest mistake and deliberate underpayment. If you overpaid because of a miscalculation or administrative error, and you correct it promptly, HMRC will not penalise you.

However, if the error was caused by gross negligence or you deliberately misreported payroll data, HMRC can charge penalties under the PAYE Regulations. That is rare for the typical small business. But it is worth getting the correction right first time.

Practical Example: A Manchester Ltd Company Corrects a 2023/24 Overpayment

Let us make this concrete. A 3-employee marketing agency in Manchester's Northern Quarter processed payroll for 2023/24. They accidentally applied a 0T tax code to a new starter who should have been on the standard 1257L code. Result: they overpaid PAYE by £1,840 across the year.

They discovered the error in August 2024, after the 2023/24 tax year had closed. Here is what they did:

  1. Calculated the exact overpayment: £1,840 in PAYE, plus £253.92 in employer NI (13.8% of the earnings difference). Total overpaid: £2,093.92.
  2. Identified the employee and confirmed their NI number.
  3. Submitted an EPS for the 2024/25 tax year, reporting the £2,093.92 as an earlier year adjustment.
  4. Repaid the employee the £1,840 over-deducted PAYE through the next payroll run.
  5. Kept copies of the original FPS, the EPS, and the repayment record.

HMRC processed the EPS within 2 weeks. The agency's PAYE liability for 2024/25 was reduced by £2,093.92. The employee got their money back. No penalties. No fuss.

If the agency had ceased trading, they would have claimed a direct repayment instead. The process is the same, just without the EPS offset.

When to Speak to an Accountant

Correcting a simple PAYE overpayment is something most employers can handle themselves. But there are situations where professional advice saves you time and money:

  • The overpayment involves multiple employees across multiple years
  • The error was caused by a complex tax code (e.g., K codes, Scottish rates, Welsh rates)
  • You have ceased trading and need to close your PAYE scheme
  • HMRC has opened a compliance check into your payroll
  • The overpayment is large enough to affect your corporation tax liability

If any of these apply, speak to an accountant. As ICAEW qualified accountants, we handle PAYE corrections regularly. We can review your payroll records, calculate the exact overpayment, and submit the correction through the right channel. It is usually a quick fix.

For straightforward corrections, use the EPS method. For closed schemes or large refunds, claim direct from HMRC. Either way, act within the 4-year window and keep your paperwork.

If your turnover crossed the VAT threshold in the last 30 days, register inside the 30-day window. That is a separate issue, but it shows why staying on top of your tax obligations matters.

Need help with a PAYE correction? Contact our team to discuss your situation.