It seems that around 14 million people are set to receive their tax code in the next few weeks. I have received calls from clients and I am currently reviewing the details. Remember, if the tax coding is wrong you will either pay too much or too little tax. This will lead to you having to pay more or that you would have overpaid tax. Make sure that the details are correct, as you are liable and responsible for the tax you pay.
I know this doesn’t sound fair but the system very clearly levies the responsibility on the individual. Hope the following helps to clarify but if in doubt check and where necessary take professional advice.
What is a Tax Code?
Tax codes are used by employers and pension providers to calculate the amount of tax to deduct from your income.
Things that typically lead to mistakes on tax coding is if you have recently changed jobs, got a company car or other work benefits, started drawing your pension, or have a new source of income.
The codes being sent out at the moment are for the tax year 2012/2013. HM Revenue & Customs (HMRC) usually sends a different tax code for each job or pension that you have.
If you have received tax coding letter(s) — open them and if you’re unsure if they are right, call the HMRC Helpline and ask. Try calling either early in the day or late in the afternoon. My experience is do not try to call especially between say 10.30am and 2.30pm, this is the worst time to call.
Don’t Worry?
Mistakes about income and tax allowances do happen (OK maybe a bit too common), which means you could end up with the wrong code.
Many local tax offices have been closed, so face-to-face advice is often unavailable.
Why Do Mistakes Happen?
A good question that has and is asked, time and time again. The best I have is the system has failings, it is not designed for those with multiple incomes and the system is over-strained. I may also be, being too kind and it’s down to simple incompetence. The bottom line is I don’t know, all I know is it goes wrong and it seems to be regularly.
Tell HMRC of Any Material Changes
If your personal or financial circumstances change, this will have an implication on your taxation status.
For example if:
- You get married, divorced or separate;
- you start to receive another source of income;
- the amount of untaxed income you receive increases or decreases.
How Do You Check Your Tax Coding?
You need to check if HMRC has correctly calculated your income and employee benefits, and that it has taken into account your personal allowance (i.e.the amount of income you can receive without paying tax).
Your personal allowance (The personal allowance for 2012/2013 is £8,105. This means anyone under 65 can earn £8,105 a year without paying any tax.) depends on your age, but can also be affected by your job benefits and your income. There is a wealth of information on the internet and HMRC’s Website to help.
What If I Work Full-Time?
You might receive a tax code, more commonly if you have started a new job in the last 12 months.
Normally happens if you:-
- Received a pay increase or decrease;
- Gone on maternity leave;
- Taken up new benefits, such as a company car or private medical insurance.
- Started a new job
From £8,105 (basic personal allowance for 2012/13 is £8,105) to the higher-rate tax threshold you will pay 20% income tax (i.e. on the next £34,370 of earnings). This means on earnings above £42,475, you will pay 40% income tax. Income above £150,000 is charged at the highest rate of 50%.
If your income is more than £100,000, you lose £1 of personal allowance for every £2 you earn. So by the time you earn £116,210, you will have no personal allowance.
On top of income tax, if you are under age 65, earning more than £7,228 a year, you must also pay National Insurance contributions. You pay a rate of 12% of the amount you earn between £146 and £817 per week.
If you earn more than £817 a week (£42,484 a year), you also pay 2% on all your earnings above this amount. Broadly speaking, to arrive at your tax code, your tax-free income is divided by ten and added to the letter which fits your circumstances.
Most common letters for people in work:
- L is for those eligible for the basic personal allowance
- K is for people who have extra untaxed income, such as company or state benefits.
The number in a K code multiplied by ten indicates how much must be added to your taxable income to take into account the excess untaxed income you have received.
For example, K497 means your untaxed income of £4,970 more than your tax allowances. This amount must be added to your total taxable income to ensure you pay the right amount of tax.
What If I’m Retired and a Pensioner?
Tax for older people can be rather complicated.
Pensioners aged 65 to 74 can have an income of £10,500 in 2012/2013 before paying tax, or £10,660 for those aged 75 and over.
Although, if you are over 65 and your income is more than £25,400 in 2012/2013, your personal allowance is reduced by £1 for every £2 of extra income you have over the £25,400 limit.
There are two main letters used in tax codes for pensioners:
- P is for people aged 65 to 74 and eligible for the full personal allowance;
- Y is for people aged 75 or over and eligible for the full personal allowance.
Remember, if you receive the basic state pension, this is taxable, but it is received without tax being deducted.
If you are aged over 77, you may also be eligible for the married couple’s allowance. You can claim this if you are married and living together and at least one spouse was born before April 6, 1935.
The married couples allowance does not reduce your taxable income, but is used to reduce your overall tax bill. A maximum of 10% of the allowance can come off your tax bill.
For 2012/2013, the full allowance is £7,705, which means you get a tax deduction of £770.50. The minimum allowance that you can receive is £2,960 for 2012/2013. You will be entitled to this amount no matter how much income you have.
If You Have Multiple Incomes?
You usually receive a tax code for every source of income. Around 18 million codes are expected to be sent to 14 million people in the next few weeks. Your personal allowance is usually deducted from your main source of income.
If you have more than one job or pension, your code should state at what rate you are being taxed:-
- BR – all income is taxed at the basic rate of 20%.
- D0 – all income is taxed at the higher rate of 40%
- NT – no tax is to be taken from your income
Any questions, email me at welshmoneywiz@virginmedia.com
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