Hidden cost of the tax code

Anthony Bailey explains how to ensure you do not pay the Inland Revenue more than you should

IT IS called an income tax code, and code is the mot-juste. Taxpayers who have not learned to decipher the code will not know whether they are paying the right amount of tax.

And that could be a lot of people. Even the Inland Revenue acknowledges that about 7 per cent of codes could be wrong- meaning perhaps 1.5 million people could be paying the wrong amount of tax. Some accountants reckon the error rate is much higher. But in its defence, the Revenue says many codes are wrong because taxpayers have not supplied it with up-to-date information.

Everyone who has tax deducted at source under the pay-as-you-earn (PAYE) system has a customised code. This accounts for the great majority of taxpayers. And it is worth taking time out to make sure the code is right.

The code is given to employers and companies paying pensions by the Inland Revenue. It shows the employer how much of your pay (or pension) is tax- free, and by implication how much tax needs to be deducted. It will also be on many people's payslips.

Codes typically have a three- digit number. You simply add on a "9" to find out how much tax-free money you get. For example, if your code is 352L, you get pounds 3,529 tax-free. It means you have just the basic personal allowance of pounds 3,525 plus a little extra because of the way a 9 is added to codes. The letters can show various things. L means you are on the basic personal allowance.

But if you want to know where the figures come from, ask your tax office (not your employer) for a Notice of Your Income Tax Code. In many cases, you will receive one automatically anyway, normally every year.

The notice has two columns. On the left-hand side are tax-free allowances. On the right-hand side are things that need to be taxed (other than your basic pay). Deduct taxable items from your allowances. Knock off the last number from the answer, and that is your code.

Either side of the sum could be wrong. Here are common errors on the allowances side:

q You have got married and are now entitled to the married couple's allowance of pounds 1,720, but are not getting it. The married couple's allowance is on top of your personal allowance. But there is only one allowance between two of you.

q You have separated or divorced and are no longer entitled to the married couple's allowance. If you are still getting it, the Revenue is likely to catch up with you eventually.

q You are a single person with children and should be getting the additional personal allowance (pounds l,720).

q Your husband has died and you are entitled to the widow's bereavment allowance (pounds 1,720).

q The Inland Revenue does not realise that your 65th birthday falls in the tax year (or that you are already 65 or over) and are entitled to a higher personal and married couple's allowance.

q If you are entitled to these age-related allowances, they can be reduced once your total income exceeds pounds l4,600. Your tax office may have over- estimated your total income.

q You may be entitled to set certain work expenses against tax.

q You may have PAYE income from more than one job or pension and may accidentally get too much tax-free pay - because the same notice of tax code is used twice - or not enough.

q Higher-rate taxpayers should check that they are getting higher-rate tax relief for contributions to personal pension plans and for donations under the gift aid scheme.

Here is what to watch out for on the taxable items side:

q The allowance restriction could be wrong. This restriction brings back into tax part of your income taken out of tax by the married couple's allowance, additional personal allowance or widow's bereavement allowance. It can be a difficult concept to grasp. Whereas tax-free allowances are normally worth more to higher-rate taxpayers, the allowances named above are worth the same amount to any taxpayer: 15p in the pound or pounds 258 a year. Basically, if your tax office has wrongly estimated your income and highest rate of tax, the allowance restriction will be wrong.

q The value of your taxable benefits from work - such as a company car, luncheon vouchers, membership of a sports club, private medical insurance - may have changed. Your employer is duty-bound to report taxable benefits to the Inland Revenue on form P11D. But there can be a delay before this works its way through to your tax code. And, of course, your employer may have made a error.

q There may be an estimate of tax payable on income from investments through PAYE. It could be wrong.

q Tax on state pensions and other taxable benefits can be collected through the PAYE system. Check the figures are right.

q A figure for taxable main- tainance payments should be scrutinised.

Those who think their codes are wrong should contact their tax offices. In addition, you can rectify mistakes such as allowances you forgot to claim during the last six tax years.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Guru Careers: Communications Exec / PR Exec

    £25 - £30K: Guru Careers: We are seeking a highly-motivated and ambitious Comm...

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    Day In a Page

    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific
    In this the person to restore our trust in the banks?

    In this the person to restore our trust in the banks?

    Dame Colette Bowe - interview
    When do the creative juices dry up?

    When do the creative juices dry up?

    David Lodge thinks he knows
    The 'Cher moment' happening across fashion just now

    Fashion's Cher moment

    Ageing beauty will always be more classy than all that booty
    Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

    Health fears over school cancer jab

    Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
    Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

    'I forgive everyone, but I don't forget'

    Fifa president Sepp Blatter issues defiant warning to opponents
    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

    Weather warning

    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
    LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

    High hopes for LSD

    Meet the volunteer users helping to see if it cures depression and addiction
    German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

    Saving Private Brandt

    A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral