Tax code calculations based on charity payments

KiKi

Hi there

Just wondering how HMRC calculated my tax code, which has just changed.

I submitted my tax return in July for 18/19. I declared £2590 in charitable donations that tax year. Therefore they raised my basic rate limit by £3238 in order to calculate what tax I was owed. All good, and I received my overpayment quickly.

They've now adjusted my tax code so that I don't overpay but I cannot work out how it's been calculated.

They've taken the standard 12500 allowance and added £1619 (so my code is 1412L). I've worked out that £1619 is pretty much half of the £3238, but I can't work out why that's the calculation. It's more logical to me that my tax code would be aligned to 12500 plus £3238, and therefore my tax code would be 1573L.

I'm tried calling but gave up after 30 minutes on hold! I'll try again next week. I'm going to ask them to revert back to my standard code anyway, as I prefer a lump sum rather than additional money each month, but my lack of understanding of their calculation is driving me nuts!

TIA
KiKi

Dazed_and_confused

You receive basic rate relief at source i.e the charity gets £3,238 despite you actually only giving them £2,590.

The gross contribution increases the amount of basic rate tax you can pay, which can in turn reduce the amount of higher rate tax payable.

In very simple terms £3,238 could save you £647.60 (£3,238 x 20%).

Assuming you are paying plenty of 40% tax on your earnings then additional tax code allowances of £1,619 will save you £647.60 (£1,619 x 40%).

KiKi

AH! The 'half' that I could recognise is related to the 20% / 40%. Yes, I'm in the 40% bracket, but was still thinking of it in terms of increasing the 20% threshold and forgot about the 40% one.

Thank you, that's so helpful.

Please could you help me with one more thing (as you seem so knowledgeable!)...? Yes, last year I got the £647 as tax relief in a lump sum at the end of the year which is how I've always done it. However. the new tax code has decreased my income tax by £289 this month. Is that because it's £647.60 / 12 months = £53.97, and they've added up all the £53.97s from April until now in one go to play catch up? And then from next month it will just reduce my income tax each month by £53.97?

Dazed_and_confused

Basically yes.

You can use this calculator to check what next month's tax will be.

http://payecalculator.hmrc.gov.uk/PAYE0.aspx

As you are receiving tax relief through your tax code your Self Assessment return will just sort out any tweaks needed i.e. you gift a bit more or less than you did in 2018:19.

KiKi

Awesome, thank you so much. I know it ultimately works out across the year; I was just rather taken aback to get £289 more this month, as I didn't realise they'd changed my code, and then couldn't work out how they'd done the new tax code calculation!

Really helpful, thank you.
KiKi

unholyangel

KiKi wrote: »

Awesome, thank you so much. I know it ultimately works out across the year; I was just rather taken aback to get £289 more this month, as I didn't realise they'd changed my code, and then couldn't work out how they'd done the new tax code calculation!

Really helpful, thank you.
KiKi

It works on apportionment. And cumulative codes effectively "backdate" to the start of the tax year (non-cumulative codes do not and only work on a pay by pay basis).

So if you're paid calendar monthly, you get 1/12th of your personal allowance each month. That accumulates (hence cumulative code) as the year goes on and is compared to your earnings to date for the year. So when you get a new code that affords a bigger allowance, you are effectively refunded back to the start of the year because your allowance to date will be bigger than it was previously.

The difference with the 1619/3238...its just due to the way PAYE is calculated - you're entitled to relief on the higher rate portion only. The difference between basic rate & higher rate, it just so happens that difference is the same as the basic rate - 20%. But PAYE would give it at your marginal rate (40%) so it needs to be halved to ensure the right relief (20%) is received.

BoGoF

If you do not intend making a similar amount of gift aid psyments this tax year you should inform HMRC now or you are going to be owing tax at the year end.

KiKi

BoGoF wrote: »

If you do not intend making a similar amount of gift aid psyments this tax year you should inform HMRC now or you are going to be owing tax at the year end.

Yes, thank you. I will make roughly the same payments, but I'll also owe interest on savings, so I'd rather get a lump sum at the end of the year. I hate having it done through my tax code. It's just a 'thing' - I like to know that I'll get any overpayment back, rather than being under and then having to owe it. It's a nice surprised that way, rather than a burden!

londoninvestor

KiKi wrote: »

Yes, thank you. I will make roughly the same payments, but I'll also owe interest on savings, so I'd rather get a lump sum at the end of the year. I hate having it done through my tax code. It's just a 'thing' - I like to know that I'll get any overpayment back, rather than being under and then having to owe it. It's a nice surprised that way, rather than a burden!

In future if you classify all your donations as "one-offs" in your return, they shouldn't be reflected in your tax code and you'll hopefully get what you're looking for.

KiKi

londoninvestor wrote: »

In future if you classify all your donations as "one-offs" in your return, they shouldn't be reflected in your tax code and you'll hopefully get what you're looking for.

I did that - I do that every year, but for some reason they've adjusted my code. They've done it in previous years, too, despite saying they were one-offs, and I had to get my code changed back then as well!