The vast majority of people know what level of income they’re likely to have in a year, but remarkably few will be able to predict their exact tax bill.
Managing your finances, especially your household expenditure, is very important to most people but arguably keeping an eye on what tax you pay is equally important. It’s not just how much we pay HMRC each year, but according to HMRC it is your responsibility to pay the correct amount and if you get it wrong, then under the new rules, it’s your fault!
In reality, those of you on a regular PAYE salary, there is probably not a lot to be concerned about, however if you’re a higher-rate tax payer, a company director, rent out a property, self-employed or a pensioner with more than one source of income, your tax affairs can very quickly become complicated.
Most individuals in these groups will have an accountant to make sure that the correct amount of tax is paid, but if you haven’t I suggest that you use the ‘Search’ box on this page for further information from past Blogs I’ve written.
Today I’m concentrating on those many millions of you in PAYE who don’t normally complete an annual Tax Return, because it may well be helpful to you to know a little more about your tax, what to watch out for, allowances or perks you could be entitled to and I’ll also try to explain some of the jargon surrounding tax.
This blog will cover:
Employee Tax Codes
Mileage for work
Benefit in Kind
Travel Loans
Marriage Allowance
Workwear and Uniforms
Cycling to Work
Childcare
First-time buyers
Everyone on PAYE will have a tax code issued by HMRC, which is usually a letter (or letters) followed in some cases by a number, so here’s an explanation of the various codes used:
- BR This code is used if you haven’t been given a personal tax free allowance and you’ll be taxed on every penny you earn
- DO This means that you haven’t been given a personal tax free allowance, nor have you any 20% band, with all income being taxed at 40%
- D1 This is used in cases where you have more than one PAYE job or pension, with all income taxed at 45%
- K This code is normally used when taxable benefits (such as a car or private health insurance) are greater that your personal allowance and if the k is followed by a number, you owe HMRC some tax
- L This is the code that most people are familiar with and indicates that you have the full personal tax free allowance
- M This is reserved for married couples and indicates that you’ve elected to receive part of your spouse or legal partner’s allowance (up to a maximum of 10% or £1,100)
- N This is the flip side of M and is used to show that you’ve elected to transfer part of your allowance to your spouse or legal partner
- NT This is the best code to see as it shows that no tax should be taken from your salary or pension
- OT This is similar to the BR coding and assumes that all of your allowances have been utilised elsewhere and that all income should be taxed. Its most often used when you start a new job and HMRC aren’t sure how much you earnt and how much tax you paid in your previous employment. If you get one of these codes get in touch with HMRC immediately
- Y This is reserved for individuals aged 75 or over and is usually good news as it indicates that you’re entitled to the maximum of all applicable allowances
Many of you will use your car on behalf of your employer and be paid a mileage rate, but if the employer’s rate is less than 45p per mile then you can claim the difference from HMRC subject to a 10,000 mile maximum
If you cycle to work, ask your employer if they’re willing to buy you a new bike, with you repaying them from your salary over a period of time. This is another ‘salary sacrifice’ scheme, saving you the Income Tax and NIC. For more information on this benefit go to cyclescheme.co.uk
Many of you will have a company car, subsidised health insurance or even a free membership to the local gym, but if you’re offered such a freebie, don’t forget they come with a price tag. The deemed value of the benefit will reduce your personal tax free allowance by an equivalent amount, which may make a difference as to whether or not you accept your employer’s generosity.
The most common benefit is a company car, so see if your employer will give you a tax-free loan to enable you to buy a car This is what is known as a ‘salary sacrifice’ and your repayments are deemed to be gross (i.e. before Income Tax or NIC) so you save the tax and NIC. Also then agree with the employer to pay you a mileage rate, if it doesn’t exceed 45p per mile, there is not deemed to be taxable.
If you’re a commuter, considerable savings can be made if you buy an annual season ticket, but it’s a big outlay that not everyone can afford. If you approach your employer they can give you a tax-free loan of up to £10,000, payable back in instalments and this is not classed as a taxable benefit.
This was brought in to help families with children and allows the partner with an unused allowance (usually non-working mums) to transfer up to 10% or £1,100 to their spouse. There is however a catch, as its only available if the person receiving the additional allowance is a basic rate taxpayer, so this allowance is worth up to £212 per year.
If you have to dress in a uniform or anything considered to be workwear to go to work, or if it’s your responsibility to wash it or repair it then you could be entitled to some tax back as you’re entitled to a flat rate allowance of £60 a year. Also if you haven’t claimed it in the past, HMRC will accept up to 4 years back claims.
If you’re your employer is family friendly and is prepared to issue you with vouchers towards the cost of childcare then each parent can claim up to £243 per month on vouchers. This benefit is similar to the previous one, in that it’s based on ‘salary sacrifice’, but the potential £5,832 annual claim a year by a couple could yield considerable savings in Income Tax and NIC. However, a word of warning for those claiming tax credits as Childcare vouchers from your employer may affect the amount of tax credits you get, so it’s best to check; go to Childcare Calculator
If you are saving to buy your first home, save money into a Help to Buy: ISA and the Government will boost your savings by 25%. So, for every £200 you save; receive a government bonus of £50. The maximum government bonus you can receive is £3,000, but a freebie is still a freebie! But if each of the couple takes out separate ‘Help-to-Buy’ ISAs, then you can double the freebie to £6,000. To read more about the scheme, go to Help To Buy
Today’s Blog has not covered every tax pitfall or very possible additional benefit available, as there’s a limit to the length of a Blog, before the reader may suffer from mental indigestion, so I will return in the not too distant future, with more tax tips and advice
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.