It is that time of year again! The new 2016-17 tax year is upon us and now is a good time to turn attention to your tax code, particularly if you recently received a nice tax code letter in the mail from Her Majesty’s Revenue and Customs (called a P2).
Not everyone receives a letter so if you are one of the lucky soles that didn’t have a look instead at the tax code on your first payslip of the new tax year (which commenced on the 6th April).
If any part of your tax code looks wrong now is a good time to let HMRC know.
But what should I check?
Tax codes are made up of two main parts – allowances and deductions, and both need looking at otherwise you could pay the wrong amount of tax.
The first thing to check is that you have received the correct amount of tax free allowance. The allowance has risen to £11000 for the coming year (unless you earn over £100000 when your allowance will start to reduce – folks who earn over £122000 will get none at all).
Then there is the married couple allowance which you may be entitled to if you or your spouse earn under the tax free allowance. Recent figures show that up to 4 million people are entitled to this but only 500,000 actually claim. Probably because HMRC haven’t done much to spread the word!
Another area to check is any work expenses included in your code. These could be flat rate expenses for items such as laundry or larger more specific amounts that have been agreed with HMRC in previous years. These can carry through unchanged from one year’s code to the next so it is definitely worthwhile checking the amounts are still correct.
These can be amounts for debts (like tax underpayments or tax credit overpayments), investment income and state pension. It is worth bearing in mind that all these figures are based on the information that HMRC hold, and this may be out of date or even their best guess of your circumstances! Make sure the numbers look right and let HMRC know if their information isn’t up to date.
Investment income is certainly an area that may need your attention since the rules around taxation of savings and dividends has changed for 2016-17 but your code may include old information. All savers will have a savings allowance of £1000 (or £500 for higher rate tax payers) which is set against the interest received, so only the amount exceeding the savings allowance should be set against the personal allowance in your tax code.
For dividends HMRC has made a fairly crude calculation on how much tax you should pay. This is because the code will deduct tax at your highest marginal rate of tax, but dividends aren’t taxable at the basic rate, they are taxed at 7.5% for a basic rate taxpayer! It is a good idea to perform your own calculations and then see if they match the amount that will be deducted by the code.
Something new that you may notice on your tax code is a letter ‘S’ at the beginning. You may get this additional letter if you live in bonny Scotland and it signifies that you will pay the Scottish rate of income tax.
This means some of your Income Tax is paid to the Scottish Government. The allowances and rate of tax you will pay this year is the same as the rest of the UK but this may change in future.
My code looks wrong – how do I get it put right?
If you do find something wrong you will need to contact HMRC and tell them so they can correct and reissue the code to you and your employer. You can ring the Income Tax Helpline on 0300 200 3300 if you don’t mind waiting in a queue and listening to lovely ‘musac’ , or you can email your query to HMRC using the form on their website https://www.gov.uk/reporting-your-tax-code-as-wrong
Finally, it is worth bearing in mind that HMRC are constantly reviewing codes before and throughout the 2016-17 tax year, so you may be the recipient of several different updated codes over the course of the year.
Don’t panic if this happens, it just means HMRC have been busy trying to get your code as accurate they can! But bear in mind that every tax code they send you is definitely worth a check!