Make it all less taxing
FEW PEOPLE understand what a tax code is or how it works but this can be a costly oversight because it determines how much income tax you pay each year.
If your tax code is wrong, HM Revenue & Customs could charge thousands of pounds more tax on your pay or pension, and rebates take time.
Employers and pension providers use your tax code to work out how much income tax to charge.they rely on HMRC to give them the right one, but it does not always work out that way. So you need to check for yourself, particularly if you recently changed jobs or made a large pension withdrawal.
The start of the tax year, which began on April 6, is the ideal time for PAYE workers to ensure their code is correct.
Which? money expert Reena Sewraz said workers on PAYE should check their tax code when they get their April payslip.
“You might find yourself on the wrong tax code, or an emergency code, if you’ve started a new job and your new employer doesn’t have a P45, or if you’ve recently had a change in salary,” she said.
This can also happen if you have started working for an employer after being self-employed, or recently took your state pension.
Your tax code is made up of numbers and letters and the most common is 1257L, which typically applies to people
with one job or pension.the L indicates that you are entitled to the standard tax-free personal allowance, which is currently £12,570.
There are more than 20 different letter combinations in total, and you can check their various meanings online at Gov.uk.
If your tax code has “W1” or “M1” or “X” at the end, you have been given an emergency tax code.
Emergency tax codes are temporary. HMRC will usually update your tax code when you or your employer supply the correct details, but until you do you may be paying the wrong amount of tax, either too much or too little. “Those on the incorrect code might be entitled to pay less tax in the coming months, or receive a rebate from HMRC for previous overpayments,” Sewraz said.
Take this opportunity to see whether you are eligible to claim any tax relief and allowances, she added.
When the over-55s make flexible lump sum pension withdrawals, they risk ending up on the wrong tax code and paying too much to HMRC.
Under the emergency tax code the sum being withdrawn is treated as if it will continue to be paid every month for the rest of the tax year.
Yet in most cases it will actually be a one-off payment – known as the “Month 1” basis.
Those taking a one-off lump sum are likely to pay far too much tax as a result, with the average overpayment a hefty £3,141.
While savers eventually get this money back the system is slow and complicated, advised Andrew Tully, technical director at Canada Life.
“It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. Otherwise you have to rely on HMRC to repay you at the end of the tax year,” Tully said.
You can find your tax code online at Gov.uk/check-income-tax-current-year, but you first need to sign in to, or create, a personal tax account – or download the HMRC app.
Otherwise check your payslip or the Tax Code Notice letter from HMRC if you get one. It’s worth taking a little effort to crack the code and pay the right amount of tax.