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Cracking the Code: Understanding your PAYE tax code
Welcome to the LB Group ‘MONEY TALKS’ where every month a Director at LB Group, a firm of Chartered Accountants, Tax and Business Advisers in London, Chelmsford, Colchester and Ipswich, will be commenting on the latest tax, wealth management..
By: LB Group
In brief, a tax code represents the tax free personal allowance to which every individual resident in the UK is entitled. If an individual under the age of 66 has no other taxable income or tax relief, they should have a tax code of 1000L (in this case the L replaces the last digit of the standard personal allowance of £10,000) and the correct amount of tax should normally be deducted without complication. The personal allowance for older taxpayers may be higher depending upon their income.
Where there is other income to be taxed, the individual can ask HM Revenue & Customs to adjust the code to ensure that the additional tax is collected through their salary or pension, removing the chance of a surprise tax bill after the end of the tax year. Similarly, the code can be adjusted to reflect any tax relief to which an individual is entitled.
What’s in the numbers
Typical taxable income which may be included in a PAYE tax code includes any benefits in kind received from an employer, such as a company car or private medical insurance. HM Revenue & Customs will often adjust a code automatically once a form P11D has been completed and submitted by an employer, but it is important to make sure that the level of benefits received has not changed significantly year on year. For higher rate taxpayers where the tax deducted at source from bank interest and other investment income does not completely cover the tax liability, an adjustment to collect the extra tax may also be included. For convenience, a tax liability from a previous year can be collected through a PAYE code rather than via a cash payment to HM Revenue & Customs.
Where the level of taxable benefits or other income is particularly high, the adjustment required to the PAYE tax code may be greater than the personal allowance amount. In these cases, the adjustment results in a negative tax free allowance, signified by a tax code beginning with the letter “K.”
If an employee incurs expenses related to their employment which are eligible for tax relief and not completely reimbursed by the employer, the tax code can be adjusted to give the relief through the payroll. In addition, higher rate taxpayers are entitled to tax relief on personal pension contributions and Gift Aid donations they have made; it is up to the individual to ensure that HM Revenue & Customs are made aware of these payments, as otherwise valuable tax relief may be overlooked.
Some special cases
Although the PAYE tax code system is fairly flexible, it is not always possible for a simple adjustment to ensure that the correct tax is deducted, especially where an individual has more than one source of employment income or pension and so requires more than one PAYE tax code to be issued. In these situations, the personal allowance may either be split between the sources or allocated entirely to one main source. Depending on the level of income from the main source, the other sources may need to be subject in their entirety to either 20% basic rate tax (using a BR code), 40% higher rate tax (D0 code) or even 45% additional rate tax (D1 code). These codes do not include
a tax free allowance, so the full income from that source would be subject to a single flat rate of tax.
Where an individual’s taxable income is more than £100,000, their personal tax free allowance may be restricted or removed altogether. Where the personal allowance is reduced due to this restriction or other calculations, this is signified by a letter “T” at the end of the code, so a 0T code will be issued where no personal allowance is available.
As the myriad of possible PAYE tax codes demonstrates, the complexity of individual circumstances can often make it extremely difficult for HM Revenue & Customs to get things right without help. It is almost always in the best interests of the individual to ensure that their PAYE code is as accurate as possible, so it is advisable to check the code and ensure HM Revenue & Customs are aware of any changes or inaccuracies which need to be corrected. It is also sensible to make sure they have your correct home address if you move; just letting your employer know will not be enough.
If you need any advice please contact LB Group (http://www.lbgroupltd.com/