Are the HMRC being stupid?

WizeGuy

Long time listener, first time caller and all that… This is a question relating to tax but please bare with… I’m providing a bit of detail to explain my situation.It's also a bit of a rant...

To cut a long story short, my partner and I had 7 rounds of IVF over 8 years, we only got one cycle on the NHS and funded the rest ourselves, each cycle cost us a lot of money (obviously) but it was worth it in the end as we now have a 2 year old daughter… and over £30k worth of debt remaining.

I’m not interested in hearing from the people who have negative things to say ‘if you can’t afford it don’t do it’, it’s our right to be parents and we did whatever it took.

So, I’m a graphic designer and I work a 9-5 job (as an in-house designer), I also freelance in the evenings as a sole trader. My salary is £23,000 and I average around £500 per month in freelance work. After paying my half of the rent and bills the rest of my salary just about covers my monthly debt repayment for various loans and credit cards.

The money I earn freelancing pays for petrol and food or any other necessities. When I earn more I usually put it towards the debt. I could earn more but when I get home, I take over the child care while my partner goes to work in the evenings. My freelance work is usually done after 9pm and there’s only so many late nights I can do before I burn out.

I opt to have the tax taken from my salary, as I suggested above we live hand to mouth at the moment so I can’t afford to save and pay it off in a lump sum and forget about it. I tried previously but there’s always something that needs replacing or repairing which means I have to dive straight into the savings anyway.

I got my salary today and noticed it was £200 less than usual! It’s because I have an emergency tax code: 332L M1… apparently, they didn’t take enough tax from my PAYE salary. After speaking to HMRC, they confirmed that my tax code has changed from 943L to 330L and they’ll be taking the extra £105 until I’ve paid the £1000 off.

The standard tax allowance is £12500, but because I am also self employed, based on my previous earnings my tax allowance was £9430, now they have decided that they haven’t been taking enough so on top of taking an extra £100 a month and telling me I owe another £1000, they have taken another £6000 OFF my allowance… I can’t help but feel like I’m getting hammered for working harder.

My profit from self employment for 2019/20 was around £3000-4000, in 2020/21 it was closer to £5000, turnover was closer to £10,000 but there were various unavoidable expenses, such as my Mac dying and needing to be replaced, that’s £2500 gone instantly.

I just feel like something isn’t right… how can they cut my allowance by more than £9000 and hit me with the extra tax… it means I have a smaller allowance than someone earning double my income?  

Every month brings me closer to looking at DMP’s and IVA’s. Last month I emailed them but haven’t been able to bring myself to answer their calls. I’m 30 and desperately want to pay off this debt and get a mortgage, so I really don’t want to go down that route, but every time I think I make progress there’s something else that makes things harder.   

Am I wrong or does it sound like a mistake? I feel like I’m in a position now where the harder I work the harder it is for me to keep the money but if I stop freelancing I won’t be able to make the payments and keep a roof over our heads.

Any advice would be massively appreciated as I don’t know where to turn without going into financial ruin. I have never missed a payment and I don’t want to, I just want to make sure I’m not being shafted by HMRC.

Cheers,

Adam

TheAble

It seems that you haven't been paying enough tax, either this tax year or in the previous one. The personal allowance change is to adjust the amount you pay going forwards so you can catch up.

For example, suppose you pay tax at 20% and you're £1000 behind on your tax payments. Then they will adjust down your personal allowance by at least £5000 (since 20% of £5000 is £1000).

Come the end of the tax year, you won't have paid more tax (theoretically) than anyone else on your level of earnings. But theirs were spread evenly whereas yours were more backloaded.

GeordieGeorge

The answer above is probably exactly right, but you can also call up your tax office to check.

They are generally very good, and will take you through how their calculations work.

The really are there to help you, not to catch you out.