I have employment income and I was expecting my tax code to go up. Instead it has gone down and I am now paying more in tax. Why is this?
Tax codes are part of the PAYE system. Their purpose is to try to ensure that the correct amount of tax is collected through PAYE each year. For most people the code will be 1250L, indicating they are getting the full benefit of the £12,500 tax-free personal allowance for the current tax year.
If your code is anything other than this, HMRC should already have sent you a letter telling you what your code will be. This letter will include a breakdown of why the code is different. This breakdown shows the full personal allowance, and the individual adjustments that have been made to reach your final code.
Where there is still some personal allowance left after adjustments, the tax code will be the amount left with the last digit removed, followed by the letter L. For example, if £6,950 of your personal allowance is left after adjustments, your code will be 695L.
If the adjustments exceed your personal allowance, your code will actually add an amount on top of your cash wages for the purpose of calculating tax. These codes start with K, followed by a figure showing the excess amount, excluding the last digit as for L codes. For example, if the adjustments were £15,000, £2,500 more than your personal allowance, then your code would be K250.
Common reasons for your tax code being adjusted are:
If you have two jobs, your personal allowance will be split between them. For example, if your main job had a salary of £9,000 a year, then that would take up £9,000 of your personal allowance. That would leave £3,500 available to use in your second job. The two jobs should get codes 900L and 350L respectively to reflect that split. If your personal allowance is entirely used up in one job then the other will have a code BR (all taxed at 20% basic rate) or, if the income from your first job is high enough, D0 (all income taxed at 40% higher rate). Because HMRC cannot be certain how much you will receive from each job, the split is rarely perfectly balanced. You can ask HMRC to amend your tax codes to make better use of your personal allowance if you wish to.
Benefits in kind
Benefits in kind are things other than money that you receive from your employer. For example, they may pay directly for health insurance or provide a company car for you to use. The value of these benefits is taxable in a similar way to your cash wages. In order to collect the tax on these benefits, your tax code will be reduced to reflect the benefit received.
Unpaid tax from earlier years
If you have not paid all the tax due in previous years, it can be collected through PAYE. If you complete a self-assessment tax return, you can ask for the tax calculated from this to be collected in this way. To qualify you have to meet these three conditions:
• You have income subject to PAYE
• Your tax bill is less than £3,000
• Your return is submitted no later than 31 October after the tax year end if on paper or 31 December after the tax year end if online.
The adjustment will be based on the tax rate expected to apply to your PAYE income. For example, if you owe £200 and are expected to pay basic rate tax at 20%, the adjustment will be £1,000.
Expected other income
If you are reporting regular other income, such as from dividends or rental, each year then HMRC can provide for an estimate of these in your code. Some people will prefer tax on this income to be taken through their PAYE, as it spreads the payment and saves them having to remember to set money aside. However, there is no requirement for tax on other income to be collected in this way and you can ask for such adjustments to be removed.
How do I get a tax code amended?
If you want to amend your code, either for one of the reasons above, or because it is simply incorrect, you can contact HMRC on the Income Tax helpline (0300 200 3300). If you have an agent, you can also ask them to request such changes on your behalf.
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