TAX CODES - 31.01.2008

Trusting the Taxman to get it right?

PAYE tax codes

The system. The PAYE system was introduced to enable every employee to pay tax weekly or monthly by instalments rather than in one hefty amount at the end of the tax year. By law, an employer has to deduct PAYE tax and NI from employees’ earnings, but how do you know how much should be deducted?

In code. Your tax office allocates you a code number that tells your employer how much you can earn before you start to pay tax. The code is a shortened method of defining your total tax-free pay (usually the total of your allowance) but the last figure is omitted. The code effectively spreads your allowances throughout the tax year. For example, a code 522L for 2007/8 means that you start paying tax after you have earned £435.41 per month (tax-free allowance for 2007/8 £5,225/12) or £100.48 per week.

The letters. The letter after your code defines your status. For example, L = basic personal allowance; for 2007/8 this would be 522L. Sometimes your taxable benefits will exceed your personal allowances, e.g. if you were taxed on car and fuel benefits, private health benefits or have other income to pay tax on. In these cases a K code is used by your employer to recoup the tax on behalf of the tax office.

Estimates. The tax office may estimate the likely taxable benefits for the 2008/9 tax year and will probably base them on old data available on their files, which could be out-of-date. You need to check the figures on your notice of coding carefully. If the estimates are excessive, phone/write to your tax office requesting a code change - be sure to quote your NI number and the reference. If the estimates are much too low, you may end up with a large underpayment at the end of the tax year.

How to check your number

Notice of coding. A notice of tax code is sent to you if your tax code changes. It details your allowances, benefits, untaxed income etc., and shows your code number. If you do not receive one, you can request a copy from your tax office (you will need to quote both your tax reference and NI number). Your employer is also notified of the new code but is not given the details as to how it is compiled, so they cannot check it for you.

Changes. You should make sure that any changes due to you are included and the code is amended if your circumstances alter during the year. The higher your code, the lower the tax (unless you have a code with a K prefix). The tax-free allowance for 2008/9 goes up by £210 (£5,225 to £5,435) so as a rule of thumb your tax code should go up by 21 (remember the last digit is replaced by a letter).

Coding out. Any tax due (up to £2,000) relating to the previous tax year can be collected through your PAYE code. So the tax calculation issued by the Taxman for a tax return sent to him by September 30 2007 (or December 30 if filed online) will have a note on it saying the outstanding tax bill of this amount is to be “coded out” (unless you have already ticked the box on your tax return telling the Taxman not to do this or he ignores it). It’s only when the new code numbers are issued that you can check that the right amount is being coded out.

The next step

For a quick guide to checking your notice of coding for 2008/9, visit http://tax.indicator.co.uk (TX 08.08.02).