Angela Rayner says ‘we love rich people that pay their taxes’
If your tax code is wrong, HM Revenue & Customs could charge thousands of pounds more tax on your pay or pension, and getting a rebate takes time and trouble.
It therefore pays to get it right first time.
Employers and pension providers use your tax code to work out how much income tax to charge. They rely on HMRC to give them the right one, but it doesn’t always work out that way.
So you need to check yourself, particularly if you recently changed jobs or made a large pension withdrawal.
Which? money expert Reena Sewraz said workers on PAYE should check their tax code when they get their April pay slip. “You might find yourself on the wrong tax code, or an emergency code, if you’ve started a new job and your new employer doesn’t have a P45, or if you’ve recently had a change in salary.”
This can also happen if you have started working for an employer after being self-employed, or have started taking the state pension.
Your tax code is made up of numbers and letters and in the 2023/24 tax year the most common is 1257L.
This typically applies to people with one job who don’t earn any untaxed income on top of that, say from a side hustle or renting out a property.
It also applies where there is no unpaid tax or taxable company benefits, say, such as a company car, or when someone is taking a pension from just one source.
If your position changes in the tax year, so will your code.
The L in 1257L indicates that you entitled to the standard tax-free personal allowance, which is currently £12,570.
The numbers in your tax code show how much tax-free income you can earn in that tax year.
You usually multiply the number in the tax code by 10 to get the total amount. So 1257L means you can earn £12,570. Someone earning £30,000 a year has taxable income of £17,430.
If you think your code is wrong, talk to your company accounts department or contact HMRC, who will issue your employer with a revised tax code as required.
You can do this on the HMRC Income Tax Helpline 0300 200 3300 or on the Gov.uk website.
There are more than 20 different letter combinations in total.
If your tax code has ‘W1’ or ‘M1’ or ‘X’ at the end, you have been given an emergency tax code.
Emergency tax codes are temporary. HMRC will usually update your tax code when you or your employer give it the correct details, but until you do you may be paying the wrong amount of tax, either too much or too little.
READ MORE: Tax code 1257L explained as ‘millions’ in the wrong bracket
“Those on the incorrect code might be entitled to pay less tax in the coming months, or receive a rebate from HMRC for previous overpayments,” Sewraz said.
Take this opportunity to see whether you are eligible to claim any tax relief and allowances, she added.
When the over-55s make flexible lump sum pension withdrawals, they risk ending up on the wrong tax code and paying too much to HMRC.
Under the emergency tax code the sum being withdrawn is treated as if it will continue to be paid every month for the rest of the tax year.
Yet in most cases it will actually be a one-off payment – known as the ‘Month 1’ basis.
Those taking a one-off lump sum are likely to pay far too much tax as a result, with the average overpayment a hefty £3,141.
While savers eventually get this money back the system is slow and complicated, said Andrew Tully, technical director at Canada Life.
”It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. Otherwise you have to rely on HMRC to repay you at the end of the tax year.”
You can find your tax code online at Gov.uk although you might need to sign in to or create a personal tax account, or download the HMRC app.
Otherwise check your payslip or the Tax Code Notice letter from HMRC if you get one. It’s worth taking a little effort to crack the code and pay the right amount of tax.
Source: Read Full Article