PAYE: top tips to help you pay the right amount of tax
If you have retired in the last few years, changed jobs, receive benefits–in-kind or have more than one job, you are most likely to be at risk from overpaying or underpaying tax. You are also at risk if you have made additional voluntary pension contributions or made gifts via the gift aid system. The recent upset regarding incorrect PAYE coding notices is hitting millions of people but it will be up to the individual to sort out their tax affairs.
A PAYE code determines how much an individual can earn before paying tax. One of the most common codes is 647L for individuals aged under 65. In practice, this means an individual can earn £6475.00 per year before paying tax (you simply take off the last digit of your salary to get the associated tax code). However, adjustments may be made to this, to take account of benefits in kind etc, and that can lead to problems as the amounts are likely to have been estimated or years out of date.
A review by HM Revenue & Customs (HMRC) of their systems has allowed them to identify and write to those where the PAYE coding is likely to have failed to collect the right amount of tax. The letters will set out HMRC’s understanding of the position which may not necessarily be correct.
Below, Richard Mannion, national tax director at Smith & Williamson, the accountancy and financial services group offers some tips to help people navigate the system.
“Anyone who has had a letter from HM Revenue & Customs requesting extra tax must pay what is requested or provide proof showing why the authorities are wrong. It may, however, be possible, to negotiate with them on the timing of any repayments if you would find it difficult to meet the repayments schedule they suggest.”
“Taxpayers should be aware that there are a number of ‘phishing’ and other scams indicating a possible tax refund. They should also remember that HMRC is sending letters about possible over or underpayments of tax which request extra tax or give news of overpaid tax. They are not sending emails or making calls to individuals and so anyone who receives a request via email or over the phone should ignore it”
“To keep your tax affairs in order, taxpayers should notify the taxman of changes that may affect their coding. For example, if you start to receive a benefit in kind or take on part time work in addition to your main job, you should let the taxman know. Similarly, if you start receiving other taxable income like rents or interest you must get in touch with HMRC.”
“In the next few months, HMRC will prepare the 2011/12 PAYE notices of coding. The latest information on file may relate to income for the year to 5 April 2009, three years before the year for which the coding will apply. So if HMRC use the 2008/9 figure as an estimate for the year 2011/12, there clearly is little or no chance that the PAYE code will produce the right amount of tax for the year to 5 April 2012.”
“Worse still, even if you do not complete a self assessment tax return, you are required by law to check your tax affairs each year. If you have underpaid tax, you must tell HMRC by 5 October following the end of the tax year. Failure to do so could mean a fine,” warned Richard.
Below, Richard outlines the categories of people who should take special care regarding their PAYE code:
If you have more than one job, or have a job and pension income
Everyone with total taxable income of less than £100,000pa is entitled to just one personal allowance (so earnings of up to £6,475 for 2010/11 are tax free). So if you have more than one tax coding for the current year covering different jobs/pensions and these include more than one allowance, this will be wrong. You should tell HMRC accordingly.
If you have more than one job and are in receipt of a pension, EACH OF WHICH IS BELOW the higher rate threshold (£37,400 for 2010/11) but when added together exceeds £43,875, then you should also notify HMRC.
If you receive benefits in kind, income from property rental or investment income
If you receive benefits in kind, rental income from property or other investment income which fluctuates from year to year, bear in mind that the amount included in the 2010/11 coding notice is unlikely to be the right figure as the code is based on taxable income received a year or two ago. You are therefore likely to be under or overpaying tax through the PAYE system. This will need to be dealt with after the year end.
If you pay extra pension contributions, AVCs or makes gifts under gift aid
A higher rate taxpayer who pays pension premiums directly or makes gifts under the gifts aid regime, you will be entitled to additional tax relief – but you need to claim it. If HMRC is notified in good time it should be possible for an adjustment to be made to the coding so that the relief is given “in year”. Otherwise it will be necessary to follow this up after the year end.
If you earn more than £100,000 per year
Anyone whose total taxable income from all sources will exceed £100,000 for this tax year, will have their personal allowance restricted at the rate of £1 for every £2 of income over £100,000. So if your PAYE coding shows the standard allowance of 645L, this will lead to an underpayment of tax, so once again you will need to tell HMRC.
HMRC has announced that PAYE will not cope with taxpayers whose total taxable income will exceed £150,000 in 2010/11 and who will be liable to pay tax on the excess at 50%. Those taxpayers will be required to complete a self assessment tax return and any underpayment will be reflected in their self assessment statement in due course.
www.hmrc.gov.uk/incometax/understand-p2.htm
www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/IncomeTax/Taxcodes/DG_171723
Richard Mannion, national tax director - 0207 131 4252/07799 761 326
Email Richard Mannion
Press: Kate Harrison / Jess Koslow 020 7131 4228 / 4264
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editors
Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Salisbury, Southampton, and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International
