Tax code question

Timii

Dear all,

I received a lump sum payment of £2,200 from outside my main employment in the 2017-18 tax year, and informed my employer that I would like to make an extra payment of £2,200 into my pension. My employer did this out of my main salary, which reduced my income tax by £2200*0.4=£880 accordingly (I was a 40% rate tax payer). The £2,200 windfall I received went to mortgage overpayment, meaning that I underpaid my income tax.

When I completed my tax return for that tax year, I chose to pay back the underpaid income tax through a reduced tax allowance for the 2019-20 tax year. As a result of of this, I have got a tax code 810L fo this year (I assume it came from 12500-880/0.2=8100).

However, I checked that this tax code means I will need to pay £1,760 more in income tax than I would if I have the standard tax allowance of £12,500. This is twice as what I owe.

It seems this is because when the tax code was calculated HMRC assumed that the £880 I owe would be paid back through 20% tax band, while in reality I am paying through the 40% band.

Is this a mistake in the tax code calculation or there is something I can do to correct this

Thanks for your ideas.

Dazed_and_confused

No one can help unless you tell us how your 810L tax code has been made up

It might be HMRC think you will only be paying 20% tax this year so the deduction to your tax code to collect the £880 needs to be £4,400 (x 20% = £880).

Or the underpayment deduction might be £2,200 (x 40% = £880) coupled with something else.

You can check the make up of the code on your Personal Tax Account.

If you report back with how the code has been calculated and what you think your pay from the company who use the tax code is going to be this tax year (your estimated P60 pay amount) that's something to work on

Timii

Dear D&C,


I just managed to check my tax account on self assessment (didn't know that the information could be found there!). It turns out that I was right and the following is extracted from there:


For the tax year from 6 April 2018 to 5 April 2019 you should have paid £7,285.2 but you actually paid £6,422.6.


Your Personal Allowance has been reduced by £4,313 to collect the £862.6 still due.


This means you will pay tax at 20% on an extra £4,313 of your income. This will be spread over the tax year so it is collected in equal instalments.


Your tax code has been adjusted for this.


I guess this calculation is because last year I avoided having to pay 40% tax by paying AVC to my employment pension. If I am a 20% band tax payer then things are simple.


This year, I would like to continue paying pension AVC at 14% (this is the total of AVC and employee's default contribution). I have a salary of £58K. If my tax code is the default 1250L, the online income tax calculation tells me that I need to pay £7476 in income tax, and this is completely in the 20% band. But with a tax code 818L, and the same pension contribution, I will be dragged to the 40% income tax bracket, and the online calculator tells me that the total tax to be paid is £9,180.



Now £9,180-£7,476=£1,704, which is way larger than what I owe HMRC, which is £862.


Apparently HMRC do not know my pension payment plan, so their calculation must be based on their assumption of how much tax I am going to pay (presumably based on my income tax last year). Should I contact them to ask for a correction of the tax code, or simply wait until the end of this tax year to claim any overpayment back?


Thanks.

Dazed_and_confused

You've lost me sorry.

Tax on £58k with tax code 1250L is £10,700 not £7,476.

But "salary" is often irrelevant for income tax purposes. It is taxable pay/salary which counts.

This is usually shown on payslips and is often lower than salary due to "net pay" pension contributions. Or salary sacrifice.

What does your April 2019 payslip show?

If you are making net pay contributions and no other pension contributions then you don't tell HMRC about them as you get the maximum possible tax relief by virtue of your taxable pay being reduced i.e. salary £58,000 less 14% net pay pension contribution = £49,880 taxable pay.

Really need expected taxable pay details and more information about pension contributions to know if the tax code is correct or not.

It may be you just need to notify HMRC of a more upto date taxable pay figure for 2019:20 but not sure about this just yet.

Timii

Sorry for the lack of information in the previous post. The income tax estimate was done using an online calculator assuming ~14% of the gross salary goes into pension.

I have just checked the payslip for April, and here are the numbers:

Taxable pay: 4048.72, Tax: 721.40

I just ran the online income tax calculator again by inputting monthly taxable pay 4048.72, and it told me my monthly income tax is £601 if using the default tax code, and £721 with tax code 818L. In the latter case I will pay an extra of £1,445 in income tax over the year, which is definitely larger than the £862 I owe.

In parallel, the total taxable pay over the 12 months would be 48585, which is below the 40% rate threshold, but having a tax code of 818L means that the allowance is 8180 instead of 12500, which brings me to the 40% bracket. I think this is the reason of the above difference.

Is this clear D&C? Thanks.

Dazed_and_confused

I think the problem is that HMRC may have you down for a different annual income for this job.

If you give them an up to date estimate of what your taxable pay (the P60 figure for 2019:20) is expected to be that should automatically adjust the underpayment deduction to ensure that £862 additional tax is collected.

The pay figure isn't necessarily £4048.72 x 12 though. If you expect a pay rise or bonus during the year you should factor that into your figure.

As you are straddling the basic rate and higher rate tax bands it is a little more complicated to get the tax code deduction 100% accurate, any small variance in your taxable pay can have an impact on it.

If your estimated taxable pay is £48,585 then I think a tax code of 962L is about right.

Timii

OK. Thanks so much for your suggestion D&C. I will write to HRMC then.

Have a nice weekend!

Dazed_and_confused

You can actually check the figure they are using now on your Personal Tax Account.

You might also be able to update the pay figure to get a new tax code.

Timii

Yes, I found the information in the personal tax account as well. It is very useful!