Are You Paying Too Much Tax?

The purpose of the PAYE system is to collect the right amount of tax from your earnings throughout the course of the year. Your tax code – or sometimes a series of tax codes – is used by your employer to work out how much tax to deduct from your earnings.

However, many people can go for years paying the wrong amount of tax – either too much or, perhaps more worryingly, too little – because they have an incorrect tax code. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position,
such as a change in jobs or acquiring or losing the benefit of a company car, or they may have started or stopped investing in a personal pension plan.

It is important that we check your PAYE code now, because it is much easier to rectify mistakes before the tax year ends. As a first step, though, you can look at your salary slip to see which code is currently being applied.

The letter in the code tells us whether your code includes one of the standard allowances, and you can see if this is right for your circumstances:

L – includes the basic personal allowance
N – taxpayers who are ‘transferors’ under the Transferable Tax
Allowance
M – taxpayers who are ‘recipients’ under the Transferable Tax Allowance
T – there is usually an adjustment in your code which requires manual checking by HMRC each year – for example, you might have a tax underpayment being ‘coded out’
K – HMRC may try to increase the tax you pay on one source
of income to cover the tax due on another source which cannot be taxed directly – for example, the tax due on your taxable employment benefits might be collected by increasing the amount of tax you would otherwise pay on your company salary. A ‘K’ code applies when the ‘other income’ adjustment reduces your allowances to less than zero – in effect, it means that
the payer has to add notional income to your real income for PAYE purposes.

The maximum tax which can be deducted is 50% of the source income.

HMRC will often try to collect tax on other income through your PAYE code but you may prefer to pay the tax through self assessment – contact us, as we can arrange for the adjustment to be removed.

From April 2016, you will pay the Scottish rate of income tax if you live in Scotland. In such cases your code will start with an S to tell your employer to deduct tax at the Scottish rate.

If you would like some advice regarding your PAYE code, call us now here at Botting & Co Certified Chartered Accountants in Littlehampton on 01903 713508. Your first meeting with us is free!

Want to read more? This article is an excerpt from our free tax and financial strategies report for 2016/17. Click here to download your free copy.

Tags: , , ,

Switch to our mobile site