What No One Tells You About Your Tax Code

To most people, a tax code is a boring and harmless series of numbers and letters – 995L, BR and K446 are just some examples.
But these seemingly incomprehensible hieroglyphics are used by your employer or pension provider to calculate the amount of tax and National Insurance that should be deducted from your wages or pension before they hit your bank account.

Who Has a Tax Code & Why is it Significant?

Tax codes are issued to those of us in Pay As You Earn (PAYE) employment or in receipt of a private pension as well as the state pension. The tax code tells your employer or pension provider what it should take and even small errors can lead to mistakes amounting to hundreds of pounds in a full tax year.

I’m constantly telling people, both employees and pensioners, that they should always check the tax taken from them under (PAYE). Unfortunately, far too few people do so and only find out later they have paid the wrong tax; great news if you are due a refund, but a potential nightmare if you receive a bill.

The problem is that unless you fill in a Tax Return, HMRC might not have all the information they need to get your tax right. They will almost certainly have information about your main wage or pension from your employer or pension providers. However small part time employers or very small pensions, may be initially missed.

In addition the Department for Work and Pensions (DWP) may have told HMRC about your taxable state benefits or your bank, building society or insurance company, may have told them about taxable interest you may have received.

Unfortunately your tax affairs may be like an old jigsaw puzzle, when HMRC puts it all together, there might well be one or more pieces missing.

Around this time of the year if you’ve paid too much, HMRC will invite you to claim a refund, but if you have not paid enough, unless what you owe is under £50, you will get a bill in the form of a PAYE P800 tax calculation.

So what should you do to sort out an Over or Under Tax Payment?

• Whether it is a refund or a demand for payment, you should check the calculation as the figure is an estimate based on the computer data HMRC has about you.
• If several jobs or pensions have been added together into one single amount of PAYE income, you should compare the figures on your P800 to other information in your possession, such as your P60, P45, P11D forms, and bank and building society statements
• See if anything may be missing that might reduce your tax liability, such as pension contributions, gift aid donations or any allowable expenses against your wages. Many expenses can be taken off your taxable income, if they have not been fully reimbursed by your employer. These include mileage allowances for using your own vehicle for business travel, and uniform or work clothes allowances for certain trades
• Check if you have got all your tax allowances as some allowances are commonly missed, such as blind person’s allowance and you only need to be partially sighted to claim this. Additionally higher personal allowances could also be due if over a certain age

So you’ve checked and found that your tax code is wrong and therefore so is the P800, what next? You should take immediate action and write to HMRC explaining why you believe their calculation is wrong and enclose copies of any relevant documents (don’t send in originals they have a habit of getting lost at tax offices!), details of any reference numbers & your NINO and send the letter by recorded delivery.
If you prefer to initially telephone, ensure you’re ready with the P800 reference number and your national insurance number (NINO) , as HMRC will ask for these plus a few security questions before discussing the calculation with you.
Keep a note of the call, including the date and time, the name of the person who you spoke to, a brief summary of what was said and always ask for a reference number for the call.
The various relevant addresses, telephone numbers and email addresses can be found at: http://search2.hmrc.gov.uk/kb5/hmrc/contactus/home.page

What are your rights If HMRC say you owe Tax?

If the P800 calculation says you owe tax, in most cases the tax will be correctly calculated and legally due and is payable, but you do have some rights, which include:

• If your employer or pension provider has made a mistake, HMRC is legally obliged to investigate whether they, not you, should pay the tax owed as a result
• If it is HMRC that has made a mistake, you may be able to invoke what is called Extra-Statutory Concession A19 (ESC A19) and get your tax written off. This concession is however only applicable if HMRC failed to make “proper and timely use” of information in its possession, which normally means tax liabilities arising from tax years ending more than 12 months ago.
• You do not have to pay immediately if you owe less than £3,000 and you can opt to have this collected by means of an adjustment to your tax code. For amounts over £3,000 HMRC should agree to you paying by instalments over at least a year, but ask if you need longer
• If your tax bill rises it can affect entitlement to means-tested benefits. As a rule of thumb, the more tax you pay, the lower your net income, so the more means-tested benefits you should be able to claim

Finally, if you don’t trust your own calculations and feel that you need some expert help, Radio 5 Live’s own tax and financial guru Martin Lewis has his own website. The site has a tax code calculator which is easy to use and will tell you not only whether you may have over- or underpaid, but it also provides a step-by-step guide as to what you do about it. So go to: http://www.moneysavingexpert.com/family/check-tax-code
Note: Working, Family and Children’s tax credits claims are not affected by this type of unexpected tax bill
 
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