Tax code change when Bankrupt

Grandma23

The Debt advisor I spoke to said my husband's tax code will change when he is bankrupt, why is this and what does it change to?

fermi

This explains it better that I can.

From: http://www.insolvency.gov.uk/guidanceleaflets/ipoipa/ipoipa.htm

Applying a 'Nil tax' code

If you pay tax under PAYE, HM Revenue and Customs (HMRC) will usually apply a 'nil tax' code to you for the rest of the tax year in which you were declared bankrupt. This means that soon after your bankruptcy, your employer will be told NOT to take any more income tax from your wages for the rest of the tax year. HMRC applies nil tax codes for various reasons, and the new tax code will not tell your employer you are bankrupt. The nil tax code does not mean no tax is due. It just enables HMRC to claim the whole of your unpaid tax for the year of your bankruptcy.

There will be extra money in your pay because of the nil tax code. This money will form the basis of an IPA or IPO, even if you have no other real disposable income. A nil tax (or NT) IPA or IPO may be the only amount you have to pay, and the agreement or order will stop when your tax code changes. If you have other real disposable income, the IPA or IPO will reduce when your tax code changes.

Example

Say you were made bankrupt on 15 September 2006 and after all spending is deducted you have real disposable income of £300 a month. It is likely you will have an IPA or IPO to pay £150 a month for 36 months. If you were in PAYE employment, a nil tax code would mean your income for a short period would be higher than normal. Part of your IPA or IPO would be a nil tax IPA or IPO for the tax you would have paid if you have not been made bankrupt, say £400 a month In those circumstances you would pay £150 a month from the date of the IPA or IPO for 36 months, and an extra £400 from the date the HMRC gave you a nil tax code, up to and including March 2007 when the tax year ends (about 6 months).