Tax code change

onlyroz

Can somebody explain how the tax code works please? I know it is related to the size of your personal allowance, which in itself is related to any taxable benefits that you receive, but I'm unclear how my employer has figured mine out.

For the last 6 months or so my code has been 000555L, and I have been paying around £483 a month in income tax. However, this month I find my tax code has changed to 000715L and I paid £323 in income tax.

I queried this change with my employer and they told me that this is correct - and if so this equates to a £160 payrise.

While I am not complaining, I am concerned that this might eventually turn out to be a mistake and I end up having to pay back the extra money, or I'll find a few months down the line that my tax code changes again to a less favourable one.

For the record, I am a basic rate tax payer, repaying a student loan, in receipt of childcare vouchers, paying into a company pension. The only "taxable benefit" I receive is company health insurance.

Can anybody please advise?

BoGoF

Your employer 'does not figure it out', HMRC tell them what code to use. If your code has changed then HMRC will have sent you an amended notice of coding as well, can you recall receiving it?

If not give them a phone and ask them to confirm the code they have for you.

CLAPTON

the normal tax free allowance for 2011-12 is 7475 per annum which corresponds to a tax code of 747L

if you have benefits in kind (i.e. health insurance) paid by the company then this will reduce your tax free allowance : so if your tax code is now 715L then that corresponds to a tax free allowance of 7155 so it look like your insurance is worth 7475-7155 = 325 per annum... does this seem correct?

presumably child care vouchers, student loan and pension are deducted at source so don't affect the tax code.

Have you recently started this job?

onlyroz

I started the job in January. Looking at the company website, the health-insurance premium is £1854.12 for a family, which should surely give me a tax code of 562L (£7475 - £1854 = £5621). Methinks that I need to get back to HR on this one. If I pay too little tax, will I be landed with a huge bill at some point?

BoGoF

What does your P11d for 2010-11 show the taxable benefit as ?

I have a feeling the tax code change is a result of the 10/11 P11d being received. Even though the benefit shown will only be the figure from January to April this is the figure HMRC will take as their estimate for the current year. My suggestion would be phone HMRC and tell them the full years figure of £1854.

CLAPTON

onlyroz wrote: »

I started the job in January. Looking at the company website, the health-insurance premium is £1854.12 for a family, which should surely give me a tax code of 562L (£7475 - £1854 = £5621). Methinks that I need to get back to HR on this one. If I pay too little tax, will I be landed with a huge bill at some point?

well, I'm only guessing that the BIK figure may be based on the value of the benefit in 2010-11 which would have only been for a few months and not the full year

onlyroz

If I leave it, will it sort itself out in the end? I.e. when they receive next year's data from the company my tax code will change again. Also note that I received health insurance in my previous job - and so I would have paid tax on that as well for the tax year 2010-2011.

CLAPTON

well assuming 20% tax rate the BIK should cost you 20% of 1854 = £370 per annum whereas you will pay only 20% of 325 = £60.5 so you owe HMRC the difference

onlyroz

So why, when I first joined the company, was my tax code set to 555L? Would this have been based on the health-insurance premiums for my previous job?

BoGoF

I am assuming that was the code on the P45, so yes based on your previous job.

chrisbur

Your tax code has increased by 160 places, this increases your tax free allowance by £1600 which assuming tax paid at 20% (which the figures you have given looks like your rate) then tax will decrease by £320 for the full year which works out as just under £27 a month. I would assume that the new code was applied in month 6 so you were getting 6 months of this allowance in one go. Next month and to the year end you will only see just under £27 a month reduction.