Vital to crack the code
PAYING THE RIGHT AMOUNT OF TAX
AS BRITONS pay more tax than ever, it is increasingly important to make sure you are paying the right amount to HMRC, and not a penny more.
You can do this by checking your tax code, but many people do not understand what it is or how to check it is correct.
One in five have never checked their tax code, according to new research from Canada Life, but this can be a costly oversight.
Among those who have, a staggering one in three found it had been wrong at some point, of whom three quarters paid on average £689 more in tax than they owed.
Pensioners have a fresh incentive to check their tax code this year, with an extra 650,000 paying income tax as the state pension rises while Chancellor Jeremy Hunt freezes the personal allowance yet again.
Your code is made up of a series of numbers and letters and HMRC uses this to work out how much income tax you should pay, said Canada Life’s tax and estate planning specialist John Chew. “1257L is the most common code, used where you have just one source of income, either through a job or pension.”
The L indicates that you are entitled to the standard tax-free personal allowance, which is currently £12,570.
You should then have a different tax code for each income stream you receive, whether that is through work or via a pension.
This is where things get complicated, Chew said. “Your tax code can vary if, say, you receive benefits from your job, such as a company car or healthcare.
“HMRC can also apply a different tax code to claim back underpaid tax.’
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 a temporary emergency tax code.
If you think your tax code is wrong, you need to contact HMRC directly, even if you have an employer, as they cannot do this for you.
You may be owed a rebate, although equally, you may owe tax. Either way, it is best to find out the right amount.
If HMRC has spotted an error, it may send you tax calculation P800 form or a Simple Assessment letter by the end of the tax year onapril 5.This will tell you how to pay tax or reclaim any overpayments.
“You will only be sent one of these forms if you are employed or receive a pension,” Chew said.
You only have four years to reclaim overpaid income tax, so the earlier you contact HMRC, the better.
Adam Bennett, workplace expert at Digital ID, said if you receive a payslip from an employer, your code should be on that. “Compare it to the code you were given at the start of the tax year or when you changed jobs.”
If you recently switched jobs, your P45 should display the correct code. “Your P60 form will also show the code used during the tax year.”
Otherwise, visit government portal gov. uk/tax-codes or contact HMRC directly.
Bennett said codes are most likely to be wrong if you have multiple jobs or pensions, or if you recently got married, moved house or changed jobs.
Over-55s who make flexible lump sum pension withdrawals also risk ending up on the wrong code and paying too much.
A wrong tax code could trigger a bill from HMRC, possibly with interest and penalties, he said. “If you have paid too much tax, you can apply for a refund.”
Mistakes can happen, Bennett added. “The key is to catch them early.”
It may seem daunting, but it is worth taking time to crack the code.