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PAYE - how can a tax code be right?

There has been a lot of press coverage recently about taxpayers paying the wrong amount of tax under PAYE (over and under) and HMRC's need to sort things out.  Obviously anyone receiving such a letter needs to check matters out firstly to make sure that HMRC's revised statement of the position is correct and secondly, if there is a request for tax, that it is being made within the prescribed time limits.

Matters will not be helped, for those people with advisers, by HMRC's recent announcement that - to save costs - they will no longer be issuing agents' copies of various documents, including tax codes. 

But the real problem with tax codes is that they involve a lot of guesswork, for example: -

  • what will you put into your pension as a pre-tax year end top up?
  • will you have any extra tax to pay on your savings income, if so how much will that income be?
  • will you change your company car in the year?
  • what will your private medical benefit cost?
  • how much will you earn, including bonuses?

HMRC look at the last data available and guess the answer to the above (and other questions) when calculating a tax code.  Bearing in mind that tax codes for any given tax year have to be issued before the year starts and so are based on the return for the year ended at least two years' previously, if a return was received at all, is it any wonder that codes are inaccurate? 

The moral must be that if you have an adviser send him a copy of any tax code changes and tell him if things change.  If you do not have an adviser - you need to look at your code and see what may need changing if circumstances vary.  The sooner HMRC is informed the sooner matters are likely to be corrected. 

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Cathy you can call her on 01908 605552.



Date: 8th September, 2010
Author: Cathy Corns


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