The unremarkable little string of numbers and letters that make up your tax code determine how much income tax you pay. Many people don’t know that it is not HMRC’s responsibility to check its accuracy – it’s yours!
The Tax Office annually issue approximately 20 million tax codes, so it’s hardly surprising that some of them are incorrect. Every taxpayer needs to check their tax code to ensure that they are paying enough, but not too much, tax. Changes in Retirement and Savings policies are having a huge impact on particular taxpayers receiving the wrong code.
Remember, this really is crucial. If you have paid too much, then you can only get back your overpayment by doing something about it. In the worst case scenario – you have not paid enough tax – then you owe HMRC.
In an interview with the Mail Online, Head of tax at the Association of Chartered Certified Accountants, Chas Roy-Chowdhury, says: “You need to know what your code says and why. If your code is not 1100L and you don’t understand why (one reason might be you receive the state pension), contact HMRC straight away. Your tax code is only as good as the information HMRC has on you. And even if this is correct, there can be glitches in its computer system.”
Savings Interest and your tax code
The National Audit Office published a report in May which referenced their concerns about the impact of the new savings tax. They fear that more than 1 million taxpayers could end up paying the wrong amount due to the addition of this new policy. Let’s be honest, the system was confusing enough already.
The new savings interest regulations mean that now you receive all of your savings interest ‘gross’. Previously, building societies and banks deducted the tax for us. As a Basic Rate taxpayer, if you annually earn under £1,000 from savings interest you have no tax to pay. Likewise, if you are a Higher Rate taxpayer who earns less than £500.00.
Any savings interest income over those amounts is still taxable and HMRC collects this through your tax code. The difficulty is that they are calculating how much interest you earn on your savings interest by using last year’s figures – generating an estimated amount of tax to pay.
There are two big reasons why this could lead to you paying too much tax. Your bank or building society’s interest has probably fallen since last year. Also, if you had a large savings pot that earned a good amount of interest which you have now spent, you could well be paying more tax than necessary. Just because the estimate is worked out by HMRC, doesn’t make it correct.
New Starting Savings Rate
At the start of the 2015-16 financial year, the government announced a new starting rate of £5,000 for income from savings. This means that taxpayers who earn up to £17,000, with a large chunk from savings interest, will not pay any tax on this particular income stream.
This is calculated by adding the £11,000 Personal Allowance, £5,000 new starting rate savings band and the £1,000 Basic Rate Personal Savings Allowance together.
All your other income between £11,000 and £17,000 is still taxable.
Other common causes of tax code confusion
- State and private pension plans
- If one partner receives Child Benefit and one partner earns over £50,000 – the repayment happens through the latter’s tax code
- Short-term contracts
- More than one job simultaneously
- Your income falls or rises due to a change in employment circumstances
Basically, whenever there is more than one income stream, then potential for Tax Code error rises.
Do you have the decryption key for your Tax Code?
So you can double check HMRC’s calculation, you need to know how to translate your Tax Code. That way you can quickly sort out any problems with the Tax Office. The numbers and letters all have their own meaning.
Numbers
The numbers refer to your Personal Allowance figure, which is how much you are allowed to earn before paying any income tax. Most people currently have the Tax Code 1100L. The current Personal Allowance amount is £11,000.
A simple trick can help you read any number section of your Tax Code – add a 0 to the end and a £ to the start. This might come in handy, as the Personal Allowance amount usually changes at the start of each financial year (6th April).
Letters
The different letter strings all have their own meanings and are usually written after the number.
| Letters | What it means | Why you have this code | Extra info |
| BR | All income with BR code is taxed at Basic Rate (20%) tax. | You have more than one income stream. | You could have BR on one income stream (eg. Pension) and 1100L on your salary. |
| D0 | All income with D0 (zero) is taxed at the Higher Rate (40%) | You have more than one income stream where one job is a normal tax code, but your second salary pushes you over into the Higher Rate tax band | |
| D1 | All income is taxed at the Additional Rate of tax (45%) | You earn over £150,000 per annum and have a pension or other income source. | |
| K | Your Personal Allowance is in the minus numbers | You owe HMRC tax, you have taxable benefits from your employer, you have other income. | Comes in front of the number. The bigger the number, the more you owe. |
| L | You receive the full Personal Allowance only | There are no complications involved in your situation. | |
| M | You receive 10% of your civil partner’s or spouse’s Personal Allowance | They have not used up their Personal Allowance entitlement | |
| N | You have given across 10% of your Personal Allowance to your spouse or civil partner. | You have not used your full Personal Allowance amount | |
| NT | You don’t pay any tax | ||
| OT | You have been taxed on all your income | If you lose your P45 and change employers you could end up on this code. | Sort this out with HMRC as quickly as possible! |
| S | You pay the Scottish rate of income tax | You live and work in Scotland | |
| T | HMRC will review your ‘Tax position’ at regular intervals | Your tax position is ‘not settled’ |
How HMRC calculate your tax free Personal Allowance
They start with the basic £11,000 figure and add on everything that could increase this total. (Things like the Personal Savings Allowance and tax deductible work expenses.) Then they deduct anything that decreases this amount. (Things like outstanding tax bills and your state pension.) This calculations generates your tax code, is given to your pension provider and/or employer and this instructs them as to how much tax they should collect from your income.
Other Influencing Factors
Potential reasons why your Personal Allowance amount may decrease:
- ‘Benefits in kind’ – things like a company car, that you receive from your employer on top of your wages, are taxable. The new ‘Payrolling Scheme’ that started in April means that the tax on these items is no longer collected through your tax code. Employers collect it through payroll by adding the monetary cost of the benefit to your salary.
- State Benefits – Some are taxable, like: Jobseeker’s Allowance, Bereavement and Employment Allowance and Carer’s Allowance.
- State Pension – this is taxable, but given before any tax deductions. It is collected through your Personal Allowance
- Outstanding tax bill – instead of going through the Self-Assessment Tax Return process, you can arrange to repay any outstanding tax bills through your tax code
- Savings Interest Income – any amount a Basic Rate taxpayer earns over £1,000 is taxed using your Tax Code. Also, any dividends income of over £5,000 will also see your code adjusted accordingly. (Not including ISAs.)
- High Earner – If your annual income is over £100,000, you do not receive the Personal Allowance. You are taxed £1 for every £2 you earn over this threshold. Therefore, if you earn £122,000, the Personal Allowance amount is effectively cancelled out.
Potential reasons why your Personal Allowance amount may increase:
- You receive the Blind Peron’s Allowance
- You claim flat rate work expenses tax allowances
- You pay subscription fees to professional organisations
- Married Couples Allowance – Those in a civil partnership or who are married and born before 6/4/35 can claim this allowance. It amounts to between £322 and £835.50 annually.
- Pension – 20% tax relief is automatically added to pension contributions of Basic Rate taxpayers. As a Higher Rate taxpayer, you should be claiming the extra 20% and HMRC can incorporate this into your tax code.
- Marriage Allowance – If one spouse or civil partner is a taxpayer and the other doesn’t use their full Personal Allowance amount, then the latter can transfer across 10% (£1,100).
Getting in touch with HMRC
If you think your Tax Code is incorrect, the sooner you speak to HMRC and sort it out the better.
By phone: 0300 200 3300. Monday – Friday, 8am – 8pm. Saturday 8am – 4pm. HMRC say their least busy times are Monday – Friday before 10am.
Online: You can check your tax code online if you have a Personal Tax Account
By Post: Pay As You Earn and Self-Assessment, HM Revenue and Customs, BX9 1AS
Tony Shanks