11th April 2018
The purpose of the PAYE system is to collect the right amount of tax from your earnings throughout the year. Your tax code – or sometimes series of tax codes – is used by your employer to work out how much tax to deduct from your earnings.
However, many people can go for years paying the wrong amount of tax – either too much, or perhaps more worryingly, too little – because they have an incorrect tax code. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position, such as a change in jobs or acquiring or losing the benefit of a company car, or they may have started or stopped investing in a personal pension plan.
It’s important that you check your PAYE code now, because it’s always better to identify any mistakes sooner rather than later. As a first step, you should look at your salary payslip to see which code is currently being applied.
The letter in the code tells us whether your code includes one of the standard allowances, and you can see if this is right for your circumstances:
L – includes the basic personal allowance
N – taxpayers who are ‘transferors’ of the Marriage Allowance – Marriage Allowance lets you transfer £1,190 of your Personal Allowance to your husband, wife or civil partner, if they earn more than you. This reduces their tax by up to £238 in the tax year. To benefit as a couple, the lower earner must have an income of £11,850 or less
M – taxpayers who are ‘recipients’ of the Marriage Allowance
T – there is usually an adjustment in your code which requires manual checking by HMRC each year – for example, you might have a tax underpayment being ‘coded out’
K – HMRC may try to increase the tax you pay on one source of income to cover the tax due on another source which cannot be taxed directly – for example, the tax due on your taxable employment benefits might be collected by increasing the amount of tax you would otherwise pay on your company salary. A ‘K’ code applies when the ‘other income’ adjustment reduces your allowances to less than zero – in effect, it means that the payer has to add income to your real income for PAYE purposes.
The maximum tax which can be deducted is 50% of the source income.
HMRC will often try to collect tax on other income through your PAYE code but you may prefer to pay the tax through self-assessment. If this is something that you would like to consider please contact us, as we can arrange for the adjustment to be removed.
HMRC has now started using information received from employers, such as notification of a new benefit to recalculate employee tax codes in real-time. Where a potential underpayment is identified HMRC will make an in-year adjustment to the code for the current tax year, so-called ‘dynamic coding’, rather than waiting until the following tax year to code out the difference.