HMRC can spring changes to your tax code in an attempt to collect more tax sooner. However, you’re not always obliged to accept the figures even if HMRC’s calculations are correct. So when can you override your tax code?
Subjective Tax Codes
Tax codes can be subjective, what one tax officer might take into account, another might ignore. Whilst there are rules for tax codes, there have been numerous examples of tax rules being applied subjectively to collect as much tax as possible.
Coding out is HMRC’s term for including adjustments in your code for income other than that received from the employment to which the code applies. You will see figures for savings, dividends, property rental income, pensions, freelance earnings and benefits in kind. Less often you will see adjustments for tax owed, types of NI debt and tax credit overpayment.
The tax figures calculated by HMRC must be accepted, but you do have the ability to request HMRC removes income relating to savings income and dividends. For clients, please contact us in the first instance and we will adjust the code for you. For non-clients, the most efficient way of completing this is to use HMRC’s secure PAYE code email service.
Leaving the adjustments for other income in your code, or even asking HMRC to put them in will mean you pay tax earlier than you need. This will be over the course of the year to which the income relates instead of on the normal payment date which is 31 January following the end of the tax year. However, you might prefer to spread the tax over a year rather than being hit with a tax bill in January, which can be a tricky time to find the additional cash required.
If you want to defer certain parts your tax bill, your best option would be to ask HMRC to remove adjustments for other income. Instead of paying the tax in one go the following 31 January, you can request HMRC to collect it by coding out the tax bill in the following year. It is important to note that there is a limit for the amount that can be collected this way and a time limit for when you can ask HMRC to code out a tax underpayment.
Sophie completes her 2015/16 self-assessment in October 2016. It shows tax payable of £2,400. She can ask HMRC to code out this debt in the next tax year, 2017/18. This means she will pay an extra £200 tax from her salary between April 2017 and March 2018.
Please note that this only applies to individuals with PAYE source income.
Savings and Dividends
Don’t forget that a new tax allowance and rate band have applied since 6 April 2016. If you’re a basic rate taxpayer the first £1,000 of savings income is tax-free. Additionally, regardless of your tax rate, the first £5,000 of dividends you receive are also tax-free. Therefore, even if you decide to accept an adjustment to your code for this type of income, make sure that it takes these tax-free amounts into account.
For information about coding out tax debts and to access HMRC’s guide to checking your tax code, visit http://tipsandadvice-tax.co.uk/download
Tip: Please contact us if you believe your tax code is incorrect.