We are reading in the press that HMRC is under attack for issuing incorrect tax codes. Obviously they insist that nothing is wrong but some investigations in to this area seem to suggest otherwise………………..

There have been many reports of HMRC sending out incorrect coding notices and despite this they seem happy that there is nothing wrong with the system used to calculate the codes.

There is some merit there but with so much of the information at their disposal being out of date it really does pay to keep a close eye on what your code is and what it encompasses.

Possible system glitch

HMRC currently adjust your code to collect tax which is not covered within the PAYE system, Investment Income for example.

If you receive £8,000 in bank interest each year this will usually have been subject to tax at basic rate before it reaches your account, i.e. £10,000 interest less 20% tax of £2,000 taken by the bank leaving £8,000 to you.

But, if you are liable to pay higher rate tax at 40% then HMRC usually collect their extra 20% by adjusting your tax code and collecting it through your salary.

As the tax rate is rising to 50% for some people in April you would expect HMRC to increase the adjustment to account for this.

However, they have admitted that their current system cannot cope with the new rate so they are only collecting up to the 40% through PAYE codes. The rest will be demanded through Self Assessment (SA) in a lump sum. This could add half as much to your tax bill which you would not be expecting!!!

Good news??

Although you may end up paying a higher SA tax bill, the tax ends up being paid later than if it were collected as a result of the coding adjustment.

I.e. For 2010/11 a coding adjustment would collect tax in your salary from April 2010, whereas under SA system the same tax will not be payable until 31 January 2012. Therefore, if you can afford to pay a lump sum then you can defer your tax for up to 18 months!

Final hint

You can instruct HMRC to remove all your adjustments from your code so that you have a normal pay. This will mean your SA payments go higher but you will have longer to pay the tax. Overall you will pay the same amount of tax, but you will merely be deferring it as long as possible.

Should you wish to discuss this, or anything else surrounding tax codes, in more detail then please contact us at Accountancy Services Direct.

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