e-mail Paul Lewis on paul@paullewis.co.ukApril 6th is the start of the new tax year. And in the last couple of months millions of people have been sent a PAYE Coding Notice. That sets out how your income from pay or a company or private pension will be taxed over the next year. It contains really important information. If you got one, find it and read it now. And then keep it carefully filed away as you may need it in the future. Not everyone who pays tax through PAYE gets a coding notice – if your affairs are straightforward with no deductions or additions then you will probably not be sent one. But read on because this information is useful to any taxpayer.
Every year we are all allowed a certain amount of income before tax is due. For 2012/13 that is £8,105. If your 65th birthday falls in the tax year, even as late as 5 April 2013, then you may get a higher tax-free allowance called an ‘age allowance’. That will be up to £10,500 if you are 65-74 and £10,660 if you are aged 75 or more by 5 April 2013. Income on top of those amounts is taxed. If your income is more than £25,400 then the age allowance is reduced and by the time your income reaches £30,190 (65-74) or £30,510 (75+) it is down to the standard £8,105.
If
you are married or in a civil partnership and either of you was born before 6
April 1935 then you will get an extra tax allowance. It is worked out in an odd
way. This ‘married couple’s allowance’ (MCA) is listed by HMRC as £7,705. But
tax relief is only given at 10% so it is worth £770.50 off your tax bill. In
your coding notice however, the MCA will be given as £3,853. That is because tax
relief at 20% on £3,853 is the same as 10% on £7,705. So you will see your
personal allowance plus your MCA which would give you a total tax allowance of
£14,513.
Your married couple’s allowance is reduced if your income is above the level at which you lose your extra personal allowance but it can never be reduced below £2,960 (which will show as £1,480 on your Notice of Coding. NOTE: These figures correct some wrong information in February’s Saga Magazine for which I apologise.
If you
are en employee there are certain things that can reduce or increase your tax
free allowance. If you get benefits such as private medical insurance or a
company car, their value is taken off your tax-free income. Some work related
expenses which you pay can be added on to your tax-free allowance. They include
a subscription to a professional body or the cost of having your work uniform
cleaned. If you pay for these and they are not remibursed they can be added on
to your tax free allowance – make sure HMRC knows about them!
A ‘uniform’is a garment you have to wear at work but you cannot wear outside work – for example if it is in company colours or has a logo on it. There is a minimum annual amount of £60 for cleaning and maintaining your uniform – but in some trades it is more. See http://www.hmrc.gov.uk/incometax/relief-tools.htm
If you get a state pension it is paid to you without tax deducted – but it is taxable. The tax is taken from it by deducting the amount of the pension from your tax free allowance. That increases the tax due on any other income.
For example, if you are 68 with a total income below £25,400 your age allowance is £10,500. If your state pension is £6,627 a year then your tax free allowance will be will show £10,500 - £6,627 = £3,873. That means you can have £3,873 of tax free income in the year and the rest will be taxed at 20%.
After your tax free allowance has been calculated it is converted into a tax code my knocking off the last digit and adding a letter. L means the normal allowance of £8105. P or Y means you are 65-74 or 75+ and get the full age allowance. T means your allowance has to be reviewed each year, for example if you are over 65 and your income is above £25,400. In the example above the £3,873 tax-free allowance becomes a tax code of 387P.
If you are 65 by 5 April 2013 – born before 6 April 1948 – then you can get the higher age allowance for the whole tax year 2012/13. HMRC will normally not give you the allowance until next tax year – and adjust backwards if you have paid too much tax in 2012/13. However, if you can show that our income for the 2012/13 tax year will be less than £25,400 contact HMRC and insist on getting the age allowance for the whole tax year.
If you have more than one source of income – for example a pension and a job, or more than one pension, then you will get a coding notice for each. Your allowances and adjustments will normally be taken off the biggest source of income. Your coding on any other source may be BR which means deduct basic rate tax off the whole lot, or D0 which means deduct tax off all that income at 40%. Finally 0T means no allowance and tax is deducted at basic and higher rates.
Unpaid tax
There is another big deduction you might get on your Coding Notice – underpaid
tax. If that is there then you will also have had a form called a P800 in the
last few months. That will relate to underpaid tax in 2010/11 or earlier years.
This underpayment happens when HMRC is not given information about your jobs or
income or it was given the information but failed to make use of it properly.
Either way, you will have paid the wrong tax in previous years.
Normally underpaid tax will be recovered through your tax coding over the next tax year. But if you get state pension and HMRC did not include this in your tax coding in 2010/11, then the underpaid tax should be spread over three tax years.
If tax is being deducted for previous years, and in some other circumstances, you may get a code K. That is used if your untaxed income is more than your allowances. It is in effect a negative tax allowance meaning that you are charged a higher rate of tax on your taxed income to recover the extra tax due. If that will cause you hardship you should always contact HMRC and ask if the debt can be spread over more years.
If HMRC is deducting underpaid tax for years before 2010/11 you can challenge that decision if you fulfil three conditions. You – or your employer or pension provider – had given the Revenue all the information it needed; it failed to act on it in time which means telling you about tax owed in 2009/10 or earlier is now too late, and if you can link the overpaid tax in 2010/11 to an earlier error then even that can be included; and you had the ‘reasonable belief’ your tax affairs were in order – in my view trusting HMRC to get it right should count as a reasonable belief! You can get the tax written off (officially called ‘given up’) under Extra Statutory Concession A19. If you are turned down ask for a more senior person to review it. More details at www.saga.co.uk/money/tax-and-benefits/challenging-that-tax-demand.aspx.
When you get your Notice of Coding check all the figures on it and the notes which will explain why the numbers are what they are. If you do not understand anything or think that some of the entries are wrong then call the number at the top of the notice and ask HMRC to explain them to you. It is better to call it from a landline as 0845 numbers will cost more from a mobile phone.
Tax codes are a way of collecting tax not assessing it and the tax deducted should always be checked at the end of the year, especially if your affairs are not straightforward.
e-mail Paul Lewis on paul@paullewis.co.uk