21 May 2018

Understanding your tax code could save you money

Understanding your tax code and how it's calculated can help you save money by making sure sure you're paying the right amount of tax.

It can also help you claim tax relief and receive money if you're due a tax rebate because of errors in your tax code, a problem that affected  (This link will open in a new window)6.7m people in 2016-17.

Everyone has a personal income tax allowance - the amount they can earn over 12 months before income tax is due. For 2017/18, it's £11,500 and from April 6, 2018, it's £11,850.

HMRC collect income tax by issuing a  (This link will open in a new window)tax code that deducts the last digit of an employee's tax allowance to create a number part, e.g. 1185. A letter is added, usually 'L', which means you're entitled to the standard personal allowance, so, 1185L for 2018-19.

If your tax code ends in 'M', it means you receive the marriage allowance from your partner. This lets them transfer £1,190 of their personal allowance to you, if you're earning more than them. 'N' means you've given the  (This link will open in a new window)marriage allowance to your partner.

When does a tax code differ from standard?

If you've underpaid income tax, HMRC may collect it by adjusting your tax code. So, if you've underpaid tax by £200, HMRC would reduce your allowance by £1,000 to collect the tax owed.

Tax codes are adjusted if you receive taxable benefits from your employer like a company car. Your employer collects it by applying the adjusted code through the Pay As You Earn (PAYE) scheme.

Employees can get a higher tax code by claiming tax relief on allowable expenses like professional subscriptions required for their job.

 (This link will open in a new window)Tax Rebate Services says there are many ways taxpayers can claim tax rebates. For example, they helped a 38-year-old mechanic from Manchester claim a tax rebate of more than £1,500 for tools he bought for professional use, through his tax return.

Is your tax code correct?

To make sure your code is correct when you start a new job, make sure to give your new employer your P45 from your last job so they can use the right pay and tax details when you start. You can check  (This link will open in a new window)your tax code is correct.

HMRC issue tax codes based on the information they hold. If they don't have the correct information you may have letters 'BR' at the end of your tax code. This means all income from this source is taxed at basic rate, 20%. If you have multiple jobs you get your tax allowance for one and are taxed at 'BR' on others.

Personal Tax Accounts and Dynamic Coding

HMRC introduced Personal Tax Accounts (PTAs) in 2015. These let UK taxpayers check their online tax accounts and show the information HMRC holds on their income and tax codes. It's a good idea to check your own account to make sure HMRC have the correct details.

In July 2017, HMRC introduced dynamic coding, which will affect many taxpayers in 2018-19.

Dynamic coding utilises more data sources so PAYE can collect the right amount of tax within the tax year. In theory, it means HMRC can quickly update codes when employers or taxpayers tell them about changes.

However, HMRC uses information held in January to create your tax code for the next financial year, so any changes from January to March aren't applied. Instead, HMRC collects underpayments through next year's tax code. When you receive your tax code, it's a good idea to check it against your PTA.

“Each year HMRC issues 40 million tax codes and processes 1.4 billion transactions," said Patrick O'Brien, Senior Press Officer at HMRC.

“Many employees have multiple jobs and for HMRC to provide the right tax code, we rely on being given up-to-date information promptly."

How many tax codes are wrong?

If your tax code is wrong, HMRC, will send you form P800. A P800 is a tax calculation showing a breakdown of your taxable income and tax paid. It's sent out by HMRC to taxpayers who've paid too little or too much tax.

It also shows your tax-free personal allowance and the tax-deductible expenses incurred that year. The P800 will show you how to apply for a refund or pay any tax you owe. You can do this  (This link will open in a new window)online.

The modern labour market is complicated and the PAYE system doesn't always get it right. In 2016-17, 6.7m P800s were issued — 2m for underpaid tax and 4.7m for people who overpaid.

Penalties

Usually, you can make sure you're paying the right tax simply by checking the details and ensuring your employer applies the right tax code. Self-employed workers and taxpayers with complex tax affairs may need an accountant to help them get it right. This is important because the penalties can be severe, especially for tax evasion.

HMRC has shared tales of the  (This link will open in a new window)biggest tax evasion penalties in 2017, including a fake 'spy' who bought holiday homes with the aid of a £1.6 million VAT fraud, plus a millionaire businessman from Kent who didn't file a single return, evading £1.3m in tax because he wasn't a 'paperwork person'. He was jailed for four years.

Applying for a refund

Ideally, your tax will be correct, but if not, then hopefully you'll be one of the 4.7m who were due a refund in 2016-17 because of errors in their tax code, rather than one of the two million who underpaid.

If you are, you won't get it automatically. If you've paid the wrong amount of tax HMRC will let you know by posting you form P800 or a Simple Assessment telling you how to claim a refund. If you're reclaiming tax paid on savings, you'll normally do this through form R40 or R43.

You can check how much tax you've paid through your job once you have your P60, which employers must supply you by May 31, following the end of the tax year. If you're self-employed, you can claim a rebate through self-assessment.

What to do with a refund

A tax refund is a welcome bonus and if you get one, it's a great opportunity to help you reach your savings goals. Nationwide has a range of savings accounts that could help you.

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