Small tax code issue.

JohnB47

Not a big problem here but I'm interested in how things have been worked out.

OK, summary. My pension provider was using the wrong tax code for my payments in April and May. I contacted HMRC who confirmed this and said they would contact the provider and give them the correct code. I would pay approx £7 extra for a couple of months and then it would revert to normal. I had done my own sums and this was expected.

Today I received another payslip from pension provider, showing the correct code.

So here's the question. When I did my own calculation, using the gross payment and applying this correct code, and comparing my 'tax deducted' amount to what the provider is quoting I see that the tax for June is £7.49 more than it should be. Fair enough, I expected to pay this amount for a couple of months but I expected it to be done by applying a temporary code for two months. So, how has the pension provider managed to take the correct, slightly higher tax, using the 'normal' code?

Has the HMRC said to the provider - here's the correct code but give us and extra £7.49 for two months, then revert to normal?

I didn't think it was done like that - I thought it would have to be a temporary code for two months.

Can anyone enlighten me?

molerat

Tax is worked out cumulatively month by month. In April you get 1/12th of your tax free allowance then are taxed on the remainder. In May you get 2/12ths of your tax free allowance and are taxed on the remainder of April and May pay reduced by the amount of tax you paid in April. In June you get 3/12ths ..... and so on. If the tax code changes mid year you get x/12ths of the new allowance and are taxed again on the full year to date pay less the amount of tax you have already paid.

chrisbur

JohnB47 wrote: »

.

OK, summary. My pension provider was using the wrong tax code for my payments in April and May.
give them the correct code. I would pay approx £7 extra for a couple of months and then it would revert to normal.

Today I received another payslip from pension provider, showing the correct code.

tax for June is £7.49 more than it should be. Fair enough, I expected to pay this amount for a couple of months

If the correct code is used then a correction occurs in the next payday. There should be no adjustment for a couple of months.

You suggest that you are expecting to pay about £7 extra for a couple of months but if the correct code has been used there would be no adjustment other than that caused by the code change.

It is possible that your code has been changed but is not on a cumulative basis; to be honest the only way to tell what your tax position is if you provide exact figures.
For last month before change and first month after change the taxable gross, tax paid, tax code, taxable pay to date and tax paid to date.

JohnB47

Thanks guys. I think, having read it a few times, that I understand molerats post.

I always thought that you could take any given month, multiply the gross by 12, then work out the tax using the tax code and get the net figure for that month. I can see now why that doesn't apply when the tax code changes at some point in the year.

I'll keep an eye on it for another three months and make sure that only 2 X £7.49 of the tax is recovered.

Cheers.

chrisbur

You can check the basis of your current code in the following way.
Take your tax code number eg 700L and put a 9 on the end eg 7009.
Divide this by 12 and multiply by the month number say month 3 to give 7009/12*3 This gives your tax allowance to date on that tax code.
Deduct this figure from your taxable pay to date and divide that by 5 to give your tax due to date.
Compare this tax due to date figure with the tax paid to date figure on your payslip.
If they are just about the same then your code has been applied on a cumulative basis and assuming the tax code is correct you have paid the correct tax back-dated to the start of the tax year.
If they are significantly different then the code has been applied on a non-cumulative basis and no account has been taken of earlier tax deductions on the wrong code, and some future adjustments will be needed.

JohnB47

chrisbur wrote: »

You can check the basis of your current code in the following way.
Take your tax code number eg 700L and put a 9 on the end eg 7009.
Divide this by 12 and multiply by the month number say month 3 to give 7009/12*3 This gives your tax allowance to date on that tax code.
Deduct this figure from your taxable pay to date and divide that by 5 to give your tax due to date.
Compare this tax due to date figure with the tax paid to date figure on your payslip.
If they are just about the same then your code has been applied on a cumulative basis and assuming the tax code is correct you have paid the correct tax back-dated to the start of the tax year.
If they are significantly different then the code has been applied on a non-cumulative basis and no account has been taken of earlier tax deductions on the wrong code, and some future adjustments will be needed.

Thanks. I'll have a play with this later but something makes me think that the number 5 in the calculation is wrong somehow.

I'll get back to you.

chrisbur

JohnB47 wrote: »

Thanks. I'll have a play with this later but something makes me think that the number 5 in the calculation is wrong somehow.

I'll get back to you.

I have assumed that your tax falls into the 20% tax band if you are paying in the 40% band it is a bit more complicated.
Assuming tax is at 20% then deducting your tax allowance from your taxable pay gives you a figure for which tax is due on. Tax is due at 20% which is 1/5 hence the divide by 5.

JohnB47

Ahh yes. OK. I'll get back to you later - off to work soon.

JohnB47

OK, finally got round to this.

I've done the calculation. The calculated amount is just 9 pence more than the tax paid to date.

So that means I've paid back the correct tax due. I'll check my next pay and make sure.

Thanks for clearing that up for me.