Your tax code can be confusing but it is extremely important to understand. That small string of numbers and letters informs your employer or pension provider how much tax free allowance you are entitled to.
An incorrect code will have very real consequences. If too much tax is being deducted from your monthly income, the money you receive immediately reduces. If not enough tax is deducted HMRC will attempt to recover the tax due, either through a tax code adjustment or as a balancing payment following submission of a Self-Assessment Return.
So how do HMRC generate these codes? The codes are based upon information that HMRC holds, either through Real Time Information (RTI) or Self-Assessment Returns. Unfortunately, these figures can still be incorrect, usually as a result of updates not triggering new codes and therefore the inclusion of historical amounts. It is therefore vital that tax codes are regularly reviewed.
It is also worth noting that where a tax payer has opted to make payment of their tax liability through their tax code, that from March 2020, HMRC will now look to adjust the tax payer’s code immediately, rather than wait for a future tax year, as is currently the case .
If you are unsure about the figures contained within your tax coding, please email you normal Whiting and Partners point of contact.