Help with Tax Code change?

GadgetGuru

Hi all
I'm a little confused with my tax code. 
I am in full time employment. 

Previous code : 1263L
New code as of 23rd Nov 2023 : 1204LX


Breakdown is as below:



Questions:

1. With regards to the underpaid £28 tax. I can't imagine where this has come from. All I can think of is last month I was provided a 2% or so 'inflation increase' on my salary which was back dated to April 2023 - so received as a backdated lump sum. However, this was in my payslip and was already taxed before I received it, so again, not sure where the £28 has come from, but anyways, when I follow the above link it leads to a note stating:

"We will start to collect this amount straight away.

To do this we have reduced your tax-free amount by £381. This means that you will pay more tax until 5 April 2024, so that we can collect the £28.00 owed.

Your tax code has been adjusted for this."

The £28 is a small amount so fair enough, but why have they reduced my tax free amount by £381 if they only need to collect £28 between now and April 2024?? I'm not sure why the extra £353 has been added?

2. With regards to the interest on savings and investments - I have no investments, so it must be just interest on savings, of which I have just over £50k. I'm assuming the bank passes across information on interest earned. I have never been bothered by interest so have not shopped around for high interest accounts. Just left my money in Natwest. Not wise I know, but just the way I am (religious beliefs etc). Upon receiving my monthly salary I generally transfer £1k straight into savings and we live off of the rest (I have limited outgoings - no mortgage, but 3 kids!).

I do not have an ISA account. Should I be opening one immediately and moving £20k into it for this year, and then another £20k in April 2024 - this should then eventually remove the £201 I'm being taxed for savings and investments?

Thank you in advance for any advice you can offer.

Dazed_and_C0nfused

1.  It will be because untaxed interest has been included in your tax code for the first time.  

And there isn't an extra £353.  The £381 is the deduction needed to collect £28 over the remainder of the tax year.  Assuming you are a basic rate taxpayer then a coding deduction of £381 would collect £76 over the course of a full tax year.  But this code will only be used for around 19 weeks so £76 x 19/52 = £28 (ish) extra tax paid.

2.  The £201 will be estimate based on the previous tax years information your bank provided to HMRC.  Likely the interest was £1,201 but the first £1,000 is taxed at 0% so the only deduction needed is £201.  This is just provisional, the actual position will be determined when HMRC receive the info for 2023-24 next year.

Moving money to an ISA is one option but getting the best overall return is generally the MSE choice 😉.

For example getting 5.5% taxable interest and paying 20% tax on it is better (financially) than 4% from an ISA.

GadgetGuru

Dazed_and_C0nfused said:

1.  It will be because untaxed interest has been included in your tax code for the first time.  

And there isn't an extra £353.  The £381 is the deduction needed to collect £28 over the remainder of the tax year.  Assuming you are a basic rate taxpayer then a coding deduction of £381 would collect £76 over the course of a full tax year.  But this code will only be used for around 19 weeks so £76 x 19/52 = £28 (ish) extra tax paid.

2.  The £201 will be estimate based on the previous tax years information your bank provided to HMRC.  Likely the interest was £1,201 but the first £1,000 is taxed at 0% so the only deduction needed is £201.  This is just provisional, the actual position will be determined when HMRC receive the info for 2023-24 next year.

Moving money to an ISA is one option but getting the best overall return is generally the MSE choice 😉.

For example getting 5.5% taxable interest and paying 20% tax on it is better (financially) than 4% from an ISA.

Thank you, that was very helpful. Makes it a little clearer!