HMRC recently announced that 1.4 million UK taxpayers had underpaid tax totaling £2billion. Anyone with underpayments of less than £300 will not be pursued, however at least 70,000 people are believed to owe more than £2,000.
In the majority of cases, the underpayments have arisen because an incorrect tax code has been used. The tax code is set by HMRC, not your employer. In many cases HMRC had recorded the incorrect changes to tax codes when people had changed jobs, had a second job or pension or had other income like property income or bank interest.
The tax code consists of several numbers and a letter. You should be advised of this by letter each year, and you can also find out the tax code from your payslip.
The number, when multiplied by 10, will give you the amount of income you are entitled to before having to pay tax.
The letters mean the following
L You are entitled to the basic personal allowance of £6,475 for 2010-11. It may also indicate that you are on an emergency tax code when it says “Month 1” – for instance when you start a new job and do not have a P45.
P For anyone aged 65-74 who is eligible for the full personal allowance, which is £9,490 for 2010-11.
Y For anyone 75 and over eligible for the full allowance – £9,640 in 2010-11.
T Used when HMRC believes there are “other items” that need to be considered as part of the calculation.
K This means your total tax free allowances are less than any benefits in kind and investment income. This is typically the case for people who have a company car.
NT No tax is to be taken from your income or pension.
The following codes are used when you have two or more sources of income and all of your allowances have been applied to your main job or pension.
BR Used when all your income is taxed at the basic rate – currently 20pc. Mainly used for a second job or a pension.
D0 Means all your income is taxed at the higher rate – 40pc. Mainly used for a second job or pension.
The good news is that your tax code should be correct if you have correctly submitted a self assessment tax return – as any tax due for payment or repayment will have been automatically calculated. The other good news is that One Accounting will check your tax code for you free of charge!