THE new PAYE tax codes for the 2013–14 tax year came into effect last month. But taxpayers who wrongly assume their code is correct could be set for a nasty shock further down the line, with HM Revenue & Customs (HMRC) changing the rules that allow some individuals to have underpaid tax written off.
With this in mind, Ritchie Turnbull, tax senior at Murray Beith Murray, offers his top tips on tax codes.
Cracking the code
Aside from tax codes beginning with a “K”, the letter in the code is largely irrelevant and does not affect the amount of tax deducted at source. The number is the important part, as this represents the net tax-free allowance you’re entitled to receive against your income. The last digit is dropped from your net allowance to form the code, so your tax-free allowance is roughly ten times the number shown in your code. Only income over and above this is taxable. A code preceded by a “K” indicates that your net allowances are negative because the total deductions included in your tax code exceed the total allowances.
Check your payslip
The basic personal allowance has been increased to £9,440 for 2013-14. This gives a standard tax code of 944L (as opposed to 810L for 2012-13) where no other allowances or deductions are included in your tax code. In these circumstances, HMRC will not have issued you with a PAYE coding notice for the year, but your employer or pension provider should update the tax code in operation automatically, so you should check the tax code shown on your next payslip to ensure that this has happened.
Check your coding notice
Where your tax code comprises other items in addition to the personal allowance, HMRC should have sent you a PAYE coding notice detailing your code for the new tax year. In this case, check that the items included in your tax code are correct and also check your next payslip to ensure that the code operated by your employer or pension provider is the one issued by HMRC.
Ignorance is not bliss
Many of us assume that the tax being deducted from our income is correct. But HMRC does make mistakes and, if an incorrect code is allowed to operate over a prolonged period of time, it can result in a nasty shock at the end of the tax year. HMRC has become much stricter about collecting underpayments of tax and will reject any appeals against these unless you are able to prove that “it was reasonable for you to believe that your tax affairs were in order”.
Help the revenue get it right
Whenever you start a new job or begin receiving a pension you should hand your new employer or pension provider parts two and three of your P45 certificate from your previous employer, so that they can determine the correct tax code. If you have not left your job, so have not received a P45, you should complete a Starter Checklist form (or P46) – which you should get from your new employer or pension provider – so they may calculate the correct amount of tax to deduct.
Students are liable to tax on their income, the same as anyone else, but as many only work part-time and their income rarely exceeds the personal allowance they do not actually pay any tax. A student who believes that tax has been deducted incorrectly, you should contact HMRC.
When individuals have several sources of PAYE income, it is likely that their personal allowance will be allocated to one source, with the others being allocated a code of BR, D0 or D1 denoting tax deductions of 20, 40 and 50 per cent respectively.
This is taxable, but tax is never deducted from it at source. If you receive a private pension as well as state pension, your state pension will be deducted from your allowances and the resulting tax code will operate against your private pension, so, in effect, the tax due on both pensions is deducted from your private pension.
HMRC is gradually becoming less accessible as it looks to reduce costs, a stark illustration being the planned closure of all 281 local enquiry centres next year. Although HMRC claims it will carry out a home visit for “those who need it”, the announcement all but ends the option of being able to take your documents to HMRC and have any questions answered face-to-face.
Don’t get hung up
As HMRC does not currently accept enquiries by e-mail, taxpayers are left with the choice of making contact by post or telephone. But HMRC contact centres failed to answer more than one in four phone calls in 2011-12, while call waiting times were anywhere up to half an hour. Therefore, a few minutes spent ensuring that your affairs are in order now may save a lot of time having to put things right in the future.
• For further information visit www.hmrc.gov.uk or call 0845 300 0627