05/06 PAYE Codes – Owe the HRMC Tax!

Financial_Savvy

My 05/06 Self Assessment has showed that I have underpaid tax as my car benefit was incorrectly calculated. The P11D cash equivalent of my car was £1456.32 and my tax code changed from 296L to 382L to 346L with the final tax code on my 05/06 P60 as 0382L. In my Dec (06/07) pay the tax code was 0396L.

My P60 shows that I paid 3857.26 of tax.

How do I work out what tax I should have paid?

Very much look forward to any replies that can help me. I have spent hours on this.

lizzyb1812

OK - I'll have a go:-

1 - Add together your gross salary, the car benefit, the gross value of any interest you have earned, any other taxable income you may have. Total = income

2 - Take your final tax code of 382 and make it 3820

1 minus 2 is what you pay tax on

Let's say this is 20,000

The first £2090 is taxed at 10%, ie tax is £209

Deduct 2090 from 20,000 = 17,910. The tax on this is at 22% ie tax is £3940-20

Total tax is therefore £209 + £3940-20 = £4149-20

It doesn't look from your numbers as though you would pay higher rate tax so I've left that bit of the explanation out.

Finally, deduct the tax figure on your P60 from the total tax figure you have arrived at and the difference is what you owe

And now for the health warnings:-

The above is an explanation of a very straightforward case - yours may be different. I've done the calculation/example based on the information you have provided, which may be incomplete.
The above assumes you were with the same employer all year.
It is normal for employers to take the effect of the car benefit into account when working out your salary deductions, but that does not mean this has definitely happened in your case.
I do not know why you are filling in a self-assessment return unless it is just because of the company car benefit (I'm self-employed so have forgotten the precise rules about when a self-assessment is triggered for employed people)

This may be the way you have worked it out already - in which case you already know the answer

If you want more info I'll do what I can. I'm sure you know you need to get this done asap.


lizzyb

Hoddie_2

Everyone's personal tax free allowance for 05/06 was 4895. You deduct 1456 for the car, so your balance of free allowances was 3439. This would have equated to code 343L so I suspect there's something else in your code for whatever reason (or HMRC never had the right car details or never acted on them).

3439 tax free <-- change this if there was something else in your code
next 2090 at 10%
next 30310 at 22%
rest at 40%

Financial_Savvy

Guys thank you for replying. Some extra info for you that may help you (to help me)

I probably could come out of the Self Assessment System, just I have been in it for years….

About 95% of my income through my standard employment and I pay tax through PAYE. There is some private work that I have done on the Self Assessment so I know that I need to pay tax on this, but it is the car benefit that is bugging me as for the last 3 years I owed them tax (when I didn’t have any private income)

I pay tax at the 22% tax bracket.

I was with the same employer all year.

There are no other benefits that would effect my tax position.

I have called HMRC about 3 times and I think I finally might understand the problem, but it didn’t help me understand the tax that I owed them. They sent through a PAYE coding notice and had the benefit down as 1075 (not 1456.32) which I have told them about. But I still don’t understand how the actual tax is calculated.

Thanks very much for your help.

lizzyb1812

Well, the actual tax is calculated in the way I set out the example - but from your new information it is clear that you do not have a straightforward set of circumstances.

From the info you have given it seems as though any liability to HMRC will be quite small, so I suggest that you ring your local tax office and arrange to see them - they really are not the ogres people think they are.

Hoddie_2

The way that company benefits are taxed is not perfect and often results in underpayments. The system relies on employers meeting their obligations on time and HM Revenue & Customs acting on information received in a timely manner. Unfortunately neither is always true.

Assume you've just received your first company car. Your employer should notify HMRC on form P46(CAR) but they fail to do so. HMRC eventually find out in July 2007 when your employer submits their end-of-year return - however they don't act on the information immediately due to the sheer number of employer returns received.

At this stage there's already an underpayment for 2006/07.

It's January 2008 and they're just reviewing your employer's return for 2006/07. They come across the car benefit figure and adjust your 2007/08 code accordingly. Two problems with this - the 2007/08 year is almost finished, and they've included a figure that relates to a part-year (it's the 2006/07 figure and you didn't have the car for the whole year).

At this point there's also now an underpayment for 2007/08 in addition to the one from 2006/07, and they have yet to start collecting either!

In early 2008 they process your employer's 2006/07 end-of-year returns and realise the car benefit figure in your code isn't correct. They amend your code so a further underpayment is unlikely. However, they will still be collecting the underpayment that already exists for some time, likely until the end of 2009/10!

And this assumes your company car hasn't changed at any stage!

I would always recommend that you ensure HMRC have up-to-date details whenever any of your benefits change, particularly if the value increases.

It's important to remember that due to the way PAYE works, an underpayment is sometimes unavoidable even if both your employer and HMRC do what they're supposed to do.

Hoddie_2

They sent through a PAYE coding notice and had the benefit down as 1075 (not 1456.32) which I have told them about. But I still don’t understand how the actual tax is calculated.

You would need to pay 22% tax on 1456 (£320) but will only have paid 22% tax on 1075 (£236) - perhaps even less if your code was operated on a W1/M1 basis (which would be the case if your tax code went down during the year).