Tax Code

NickPoole

Greetings. I've have various income sources (nothing grandiose, wage plus pensions) and have been channelling big chunks of wage into AVC to avoid 40% tax (am aware of 60% or salary limitation).

HMRC changed my code to collect some unpaid tax for last year. They then changed the code again after I started receiving CS pension. I then amended estimated taxable income and they gave me a new code.  The new code is a K (negative) code on week1/Month1 basis. All well and good.

The Month 1 code allows me to adapt my AVC payments as close to optimal as possible so suits me. But what worries me is that this could all come crashing down if later towards end of tax year HMRC work it out again and switch back to a revised cumulative code.

Anybody know how likely this is? Without further income changes or triggers would HMRC revisit again till after tax year ends?

Nomunnofun1

NickPoole said:

Greetings. I've have various income sources (nothing grandiose, wage plus pensions) and have been channelling big chunks of wage into AVC to avoid 40% tax (am aware of 60% or salary limitation).

HMRC changed my code to collect some unpaid tax for last year. They then changed the code again after I started receiving CS pension. I then amended estimated taxable income and they gave me a new code.  The new code is a K (negative) code on week1/Month1 basis. All well and good.

The Month 1 code allows me to adapt my AVC payments as close to optimal as possible so suits me. But what worries me is that this could all come crashing down if later towards end of tax year HMRC work it out again and switch back to a revised cumulative code.

Anybody know how likely this is? Without further income changes or triggers would HMRC revisit again till after tax year ends?

Very unlikely. HMRC only change a code for a reason. 

eskbanker

NickPoole said:

Greetings. I've have various income sources (nothing grandiose, wage plus pensions) and have been channelling big chunks of wage into AVC to avoid 40% tax (am aware of 60% or salary limitation).

HMRC changed my code to collect some unpaid tax for last year. They then changed the code again after I started receiving CS pension. I then amended estimated taxable income and they gave me a new code.  The new code is a K (negative) code on week1/Month1 basis. All well and good.

The Month 1 code allows me to adapt my AVC payments as close to optimal as possible so suits me. But what worries me is that this could all come crashing down if later towards end of tax year HMRC work it out again and switch back to a revised cumulative code.

Anybody know how likely this is? Without further income changes or triggers would HMRC revisit again till after tax year ends?

It'll be best to understand two different concepts that are sometimes conflated....

Whether or not you're liable to pay any higher rate tax is solely determined by your aggregate taxable income across the whole tax year.

Meanwhile, tax codes are simply a mechanism to collect an appropriate (but estimated) amount of tax via PAYE.

Something like unpaid tax from a previous year affects the latter but not the former, so you need to calibrate AVCs according to the former, not the latter.

NickPoole

eskbanker said:

NickPoole said:

Greetings. I've have various income sources (nothing grandiose, wage plus pensions) and have been channelling big chunks of wage into AVC to avoid 40% tax (am aware of 60% or salary limitation).

HMRC changed my code to collect some unpaid tax for last year. They then changed the code again after I started receiving CS pension. I then amended estimated taxable income and they gave me a new code.  The new code is a K (negative) code on week1/Month1 basis. All well and good.

The Month 1 code allows me to adapt my AVC payments as close to optimal as possible so suits me. But what worries me is that this could all come crashing down if later towards end of tax year HMRC work it out again and switch back to a revised cumulative code.

Anybody know how likely this is? Without further income changes or triggers would HMRC revisit again till after tax year ends?

It'll be best to understand two different concepts that are sometimes conflated....

Whether or not you're liable to pay any higher rate tax is solely determined by your aggregate taxable income across the whole tax year.

Meanwhile, tax codes are simply a mechanism to collect an appropriate (but estimated) amount of tax via PAYE.

Something like unpaid tax from a previous year affects the latter but not the former, so you need to calibrate AVCs according to the former, not the latter.

Yes I think I understand!

My total taxable income for the year is all my wages and pensions including State pension less pension contributions including AVCs

Usually I get 12,570 tax free and another £37,700 on top of that at 20% and anything over at 40

They adjust the 12570 to collect extra unpaid tax either for last year or anticipated.

So normally I'd want my taxable income after pension contributions to be 50270 or less.

But if they have adjusted that code to collect owed tax that £50,270 would be reduced. So my AVC amount would have to be higher.

Are you saying that regardless of tax code if my taxable income (income less pension contributions) is under 50270 then I am not liable to 40% (let's assume savings interest is under £1000)? 

What is the point of HMRC changing the tax code if they are going to ignore it when they do the final sums?

Dazed_and_C0nfused

NickPoole said:

eskbanker said:

NickPoole said:

Greetings. I've have various income sources (nothing grandiose, wage plus pensions) and have been channelling big chunks of wage into AVC to avoid 40% tax (am aware of 60% or salary limitation).

HMRC changed my code to collect some unpaid tax for last year. They then changed the code again after I started receiving CS pension. I then amended estimated taxable income and they gave me a new code.  The new code is a K (negative) code on week1/Month1 basis. All well and good.

The Month 1 code allows me to adapt my AVC payments as close to optimal as possible so suits me. But what worries me is that this could all come crashing down if later towards end of tax year HMRC work it out again and switch back to a revised cumulative code.

Anybody know how likely this is? Without further income changes or triggers would HMRC revisit again till after tax year ends?

It'll be best to understand two different concepts that are sometimes conflated....

Whether or not you're liable to pay any higher rate tax is solely determined by your aggregate taxable income across the whole tax year.

Meanwhile, tax codes are simply a mechanism to collect an appropriate (but estimated) amount of tax via PAYE.

Something like unpaid tax from a previous year affects the latter but not the former, so you need to calibrate AVCs according to the former, not the latter.

Yes I think I understand!

My total taxable income for the year is all my wages and pensions including State pension less pension contributions including AVCs

Usually I get 12,570 tax free and another £37,700 on top of that at 20% and anything over at 40

They adjust the 12570 to collect extra unpaid tax either for last year or anticipated.

So normally I'd want my taxable income after pension contributions to be 50270 or less.

But if they have adjusted that code to collect owed tax that £50,270 would be reduced. So my AVC amount would have to be higher.

Are you saying that regardless of tax code if my taxable income (income less pension contributions) is under 50270 then I am not liable to 40% (let's assume savings interest is under £1000)? 

What is the point of HMRC changing the tax code if they are going to ignore it when they do the final sums?

No, you haven't understood to be honest.

You've got it all wrong.  You are conflating your Personal Allowance (£11,310 or £12,570 unless your adjusted net income is >£100,001) with your tax code allowances.

They don't ignore it though.  If you get a tax calculation like a P800 then you would have your correct Personal Allowance (£11,310 or £12,570 unless your adjusted net income is >£100,001) and at the end of the calculation there would be tax underpaid of £x added to the amount due.

And no, that does not mean you are paying the tax owed twice 

eskbanker

NickPoole said:

Are you saying that regardless of tax code if my taxable income (income less pension contributions) is under 50270 then I am not liable to 40% (let's assume savings interest is under £1000)?

Basically, yes.

NickPoole said:

What is the point of HMRC changing the tax code if they are going to ignore it when they do the final sums?

Because, as above, the final sums relate to working out your actual tax liability for the tax year, whereas tax codes are just an approximate attempt to collect what they think you'll owe in tax, which can include liabilities from prior tax years, as well as estimates of non-PAYE income streams, etc.

NickPoole

eskbanker said:

NickPoole said:

Are you saying that regardless of tax code if my taxable income (income less pension contributions) is under 50270 then I am not liable to 40% (let's assume savings interest is under £1000)?

Basically, yes.

NickPoole said:

What is the point of HMRC changing the tax code if they are going to ignore it when they do the final sums?

Because, as above, the final sums relate to working out your actual tax liability for the tax year, whereas tax codes are just an approximate attempt to collect what they think you'll owe in tax, which can include liabilities from prior tax years, as well as estimates of non-PAYE income streams, etc.

Many thanks.

eskbanker

NickPoole said:

Are you saying that regardless of tax code if my taxable income (income less pension contributions) is under 50270 then I am not liable to 40% (let's assume savings interest is under £1000)?

Just one other point - remember that savings interest is taxable income, even though there's a nil-rate band of £500/1000, so may need to be factored into your evaluation if you're aiming to be right on the higher rate cusp.

NickPoole

eskbanker said:

NickPoole said:

Are you saying that regardless of tax code if my taxable income (income less pension contributions) is under 50270 then I am not liable to 40% (let's assume savings interest is under £1000)?

Just one other point - remember that savings interest is taxable income, even though there's a nil-rate band of £500/1000, so may need to be factored into your evaluation if you're aiming to be right on the higher rate cusp.

That's worth taking into account. My latest calculations make my annual taxable pay £48,832 so that gives me plenty of leeway (I think)

Thanks again