The tax man has made a monumental cock-up meaning a lot of us could end up on incorrect tax codes. Fail to correct your code and you risk paying too much tax, potentially costing you up to several thousand pounds..
It's that time of year when HMRC posts tax codes to many employees and pensioners for the forthcoming tax year - normally a pretty dull event. But thanks to a computer error hundreds of thousands of us could receive the wrong code and some might even receive too many codes, risking the loss of personal allowances. It seems you're most likely to be affected if you've changed jobs in recent years.
What are tax codes?
Tax codes are a few digits, such as 647L, that tell HMRC and your employer or pension provider how much income you're allowed to earn over the financial year before you pay tax.
Should I be worried?
If you're an employee or pensioner then yes. There's no need to panic, but you should check your tax code over the next few weeks to ensure you don't end up paying too much tax from April.
What's at stake?
End up on the wrong tax code and you could lose some, or all of your personal allowance. For someone under 65 this £6,475, so depending on how much you earn you could end up paying up to 40% of this allowance in unnecessary tax.
Is it my problem?
Yes, no matter how unfair it might seem. While HMRC is to blame for sending out some incorrect codes, it's ultimately your responsibility to ensure your tax code is correct.
What should I do?
If you're an employee or pensioner, check that your tax code for the 2010/11 tax year is correct. If you haven't received a tax code in the post then ask your employer(s) and/or pension provider(s) what code they're using for you.
How do I check my code?
You might think checking your tax code is like trying to crack the Enigma, but it's not usually too difficult.
Most tax codes are a number followed by a letter while a few will simply be two letters.
Number – when multiplied by 10 the number gives the amount of income you can earn in a year before paying income tax, i.e. your available personal allowance. Unless you have a K code in which case it's the amount that must be added to your taxable income to take account of untaxed income you've received.
Letter – the letter tells HMRC what allowance, if any, you're eligible for.
Special Codes – if you have two or more sources of income you might have a two letter code, usually in relation to a second job or pension. This tells HMRC that your allowances have been applied to your main job or pension (for which you'll have a normal code).
| Letter/Special Code | What it means |
|---|---|
| L | You're eligible for the basic personal allowance. |
| P | You're aged 65 to 74 and eligible for the full personal allowance. |
| Y | You're aged 75 or over and eligible for the full personal allowance. |
| T | There's other items HMRC needs to review in your tax code. |
| K | Your untaxed income on which tax is due is greater than your allowances. |
| BR | All your income is taxed at the basic rate of tax (most commonly used for a second job or pension). |
| D0 | All your income is taxed at the higher rate of tax (most commonly used for a second job or pension). |
| NT | No tax is to be taken from your income or pension. |
Working out your tax code requires 4 steps:
- Add up your tax allowances (for most people it's simply your personal allowance e.g. £6,475).
- Add up any untaxed income and taxable employment benefits (let's assume £1,275).
- Deduct the total in (2) from (1) (e.g. 6475 – 1275 = 5200).
- Divide the balance in (3) by 10 and add the letter that suits your situation (e.g. 520L).
You can read more on the HMRC website.
What if I think it's wrong?
Contact HMRC and tell them, but wait until after 31 January as they're a bit tied up with last minute self assessment tax returns this week.
Read this article at http://www.candidmoney.com/articles/article55.aspx
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