Many of us in the UK with relatively high rates of income tax take a look at our salary slip each month and are shocked by just how much has been deducted for income tax. Of course, we understand why we pay our taxes and we benefit from the advantages of such a system:free state school education, public libraries and sports facilities, easy access to free healthcare. And yet we don’t want to be paying more than we have to for these benefits and this is just as true if you are employed or running your own small business.But just how can we check if we are paying the right amount of tax out of our hard earned income? We could employ an accountant, we could check out a small business advice website or we could check ourselves on the HMRC website
In the UK everyone is assigned a tax code by the tax authorities (HMRC) that indicates to your employer how much tax to deduct at source so if you are paying too much tax (or think you might be) then the most likely cause of the error is having been given an incorrect tax code. If you have recently changed your job, or returned from working abroad, if you have more than one job or received employee benefits from a previous employer; these are all issues that could affect your tax code to your detriment.
Often HMRC will not be aware of the changes so will not be aware that anything is wrong with your tax code, especially if you are not required to complete an annual tax return, which would ordinarily bring such problems to light. Other causes of incorrect amounts of tax being deducted are the allocation of a temporary code which is never corrected to the right code and your code wrongly indicating that you receive benefits from your employer such as private health insurance, gym membership, free accommodation or the use of a company car.
Tax codes can be somewhat cryptic so it is hard to know for sure if it is correct simply by looking at your payslip details but it is not difficult to checkyour code via the HMRC website and you can easily do this yourself.
If you are employed full-time or part-time then your tax code will be displayed on your weekly or monthly payslip and also on your annual P60, which shows the total amount earned and total tax deducted for the year. A UK tax code is typically two or three numbersfollowed by a letter such as 945L. If you have more than one job then your code may be different as, in this case, the rules for determining the tax code can be different.
If you first look at the number, these represent your annual tax free allowance (the amount you can earn before you become liable to pay any tax). So in the example of 945L anyone with that tax code could earn £9,450 in any one year before paying any income tax. The letter is an indication of the type of tax to be paid after the limit has been reached and is related to your age with those people over the normal retirement age usually having a different letter to those still under statutory retirement age.
If you suspect you may be paying too much tax then visit the HMRC websiteand first check the current tax free allowance rate as this is the easiest way to make a quick check of your code. You can contact HMRC and request a tax assessment but if you know a good chartered accountant then ask them to help you out.