Am I paying the right amount of tax?

This question comes to most employees’ minds at this time of the month (Payday)!

Especially when you see the actual amount received in the bank and probably you have done some extra hours just to ensure you have a push in your income.

Unfortunately, your employer has nothing more than to pay you the actual amount that you have earned in their payroll.

In fact, your employer would even contribute to your national insurance pot by paying employers national insurance.

For example, if your earnings are £1000, your employer would pay £138 into your national insurance pot.

Another contribution that your employer makes is a pension if you qualify and you haven’t opted out of the auto-enrolment, every time you contribute to your pension they do as well.

To check if you qualify to be automatically enrolled into a pension, kindly click the link.

One of the major determinants of your net pay.

 Tax code is very important to every taxpayer in the UK. It’s one of the determinants for calculating the amount of tax that you pay.

If it is wrong, you could either be paying too much tax or paying very little tax.

The irony about tax code is that even though your employer is paying your net income,

they do not have any information about your tax code.

 They simply input the tax code that has been provided to them into the payroll software and pay the net amount to you.

So how do you understand your tax code?

Your first job is to find the set of numbers on your payslips!

The next question you then need to ask is that “Is it the right one”?

Most taxpayer’s tax code in the UK is 1250L for tax year 2019/20 and 2020/21.

If it’s higher it means that you are paying a lower tax because you are claiming some tax relief.

Examples of such reliefs are work-related expenses such as subscription, uniforms, travel, or charity gift made, private pension contributions, loss from your self-employment as reflected in the self-assessment, etc.

Who is responsible for setting the tax code?

The dangerous part of this adjusted tax code is that its automated most times.

It would continue to adjust your tax code until you advise HMRC otherwise.

If a wrong code that has been applied to your income when calculating your tax this could lead to owing HMRC .this results in having an unplanned debt.

The code 1250L could also be a lower figure, this could be due to adjustment made from benefits received by you from your employer such as car benefit, house benefit, medical insurance, cheap loan etc.

Also as stated above if you have stopped receiving these benefits, you could still be paying too much tax because you haven’t informed HMRC of your change in the circumstance.

Example 

George is a lawyer that works for Georgian Solicitors. His employment income is £50,000.

He also drives a BMW provided by the firm with a taxable benefit of £5000.

They also pay for his medical insurance with a taxable benefit of £2500.

He received a cheap loan from the practice and the taxable benefit for this is £1780

He pays a subscription to the bar association £850 yearly.

His wife has transferred some of her personal allowances to him because she works a few hours a week.

He has been told by HMRC that he has underpaid tax from previous years and its tax code is adjusted by £1250

Calculation of Georges tax code.

The starting point is                 12500

Add

Subscription              850

Marriage allowance 1250

2100

14,600

Deduct

Car benefit              5000

Medical Insurance   2500

Cheap loan             1780

(9280)

5320

So George’s tax code would be 532M (the 0 disappears and is replaced by M because of the marriage allowance).

So, where did you will find this information about your tax codes?

HMRC would normally send you a P800 form that explains this information above.

Also, you can set up your personal tax account. If you want to know how to set up your personal account with HMRC, kindly click this link

Some other common codes that you could have on your payslip.

• K code – This is just because you have exhausted all your personal allowance from adjusted tax code and in fact, HMRC is deducting the tax that you are owing them. So rather than reducing your tax that you pay, you are paying more.
• BR: This is an emergency tax that is given to taxpayers usually when they do have two or more employments or when the employer is not aware of the tax code to apply for them.
• OT tax code: This is applied as an emergency tax code but for higher-earning taxpayers.
• Code with S: this is the code that shows the taxpayer is a resident in Scotland
• Code with M &N: These codes show that the taxpayer claims marriage allowance.

Conclusion on tax code calculation.

If you are unsure about your tax codes or tax that you are paying.

You can actually call the HMRC on 03002003300 for more explanation

If you will like more advice with your personal tax, you can contact by emailing diaryofatxgirl@taxgirl.co.uk