They have lowered my tax code????

AirlieBird

No. Your allowance stays the same. The point is to collect tax that will not be collected automatically by other means, in the OPs case for benefits in kind but it can also be a method for collecting tax on interest for higher rate taxpayers, or indeed giving tax relief on pension contributions for higher rate taxpayers.

Your confusing reducing your allowance with reducing the amount of tax free pay you receive through pay. The two are different. In effect part of your personal allowance is transferred to the benefit in kind which results in you receiving less tax free pay in your wage packet.

Horizon81

Thanks for explaining but I still dont get it.

My tax code is now 745L which on the coding notice is derived from £7475 - £20 = £7455 - in other words they have lowered my allowance.

If you're saying that my allowance is still £7475 then how are HMRC going to collect the tax on the £20 extra from last year?

dtaylor84

Horizon81 wrote: »

Thanks for explaining but I still dont get it.

My tax code is now 745L which on the coding notice is derived from £7475 - £20 = £7455 - in other words they have lowered my allowance.

If you're saying that my allowance is still £7475 then how are HMRC going to collect the tax on the £20 extra from last year?

You're still confusing your allowance (£7475) with your tax code (745L).

Your tax code has been reduced by 2 to collect an extra £4 tax (20% tax on £20) through PAYE.

If you were to complete a tax return, your calculation would look like this:

Earnings: £17,455 (for example)
Less personal allowance: £7,475-
Taxable earnings: £10,000

Tax @20%: £2,000
plus unpaid tax from last year: £4
less tax collected by PAYE: £2,004-

Total due: £0.

Your tax code is just that - a code that is used to make the PAYE process collect the correct amount of tax. Your allowance is set by law and is not changed by a notice of coding.

Horizon81

So the allowance remains the same but they still take the £4 from the previous years underpayments. Call it what you want but basically it's an adjustment on this years tax paid to take into account the underpayment from the last year.