A tax code or what HMRC call a PAYE Coding Notice is the means by which your tax free allowance is allocated to the pay for your job if you are an employee. Every month a portion of your income will not be taxed, and the rest will be taxed at the basic rate of 20% for the next £37k then 40% and 50% thereafter (for 2010/11) depending on how high your income is. Many employees and employers will be aware of the number of tax code notices issued early in 2010 and with many of these being incorrect many people are concerned as to whether this is correct. The coding consists of a number of parts:
- Personal allowance – everyone has a personal allowance which is a tax free band, these are normally £6475 for the younger working population, rising to £9.5k for the over 65s who also get an additional amount for married couples of at least £2.6k. This sets the level from which other adjustments are made.
- If you have more than 1 employment or pension and one is under the personal allowance limit, HMRC will issue two coding notices, one which “should” cover the smaller amount and the balance of the tax free amount is allocated to the other employment. This means that you will not be overtaxed. This is often used for pensioners where part of the allowance is allocated to the state pension and the rest to other income. In order to check this make sure the deduction for “state pension/state benefits” is about the same or a little more than the annual state pension you receive.
- Benefits in kind – employees sometimes get benefits from their employers such as health insurance or company cars. These are part of taxable income so in order to tax these amounts correctly part of the personal allowance is taken away which by default means that this part of income becomes taxable. In order to check this make sure that the figure deducted from your code is the amount of the benefit paid for the year, which should be shown on the P11D form you receive from your employer every year. If you no longer receive a benefit you should call or write to HMRC to advise them so they can amend the code.
- Additional allowances for Gift Aid and pension contributions – both of these are taxable at the basic rate (although pension contributions are now restricted for the very highest earners (over £150k), so if you are a higher rate taxpayer HMRC will give you an allowance to make sure that these are not taxed at the higher rate on these.
- If you have underpaid tax as a result of your tax code being wrong you must advise HMRC by preparing a Self Assessment Tax Return.
If you have identified an error you can call HMRC using the 0845 number but this is often accompanied by a very long wait, so alternatively write to them, but the processing time will be several weeks, so there is no fast and simple solution.
We hope you find the contents of this blog useful; the principles of allocating the tax code are fairly simple but if you are unsure you should of course always seek professional advice for your specific needs. Alastair Wood, AW Accounting – Accountants who “speak your language”