Technical Briefings
01 June 2011
Pay as you Earn – Only PAYE doesn’t always live up to its name
One of the reasons HMRC are so keen to classify workers as employed rather than self employed is that under the PAYE system, tax reaches the government's coffers much more quickly than it does under self assessment. But the system isn't perfect as recent problems, many affecting pensioners, have shown. But it's not just pensioners who need to keep an eye on the tax that's already being deducted, and employees should be aware of the issues raised by this article.
Out of date coding
Although the deadline for filing your self assessment return is 31 January following the end of the tax year, leaving it to the last minute means that any errors in your current year coding are unlikely to be corrected before the 5th April. This means that you may start the next tax year with a code that is up to 2 years old. The answer of course is to submit your returns a little earlier, but if that isn't possible to do then check your coding notice when it comes, especially if you receive benefits from your employer which may change year on year.
If you rely on your accountant to check this for you, please bear in mind that HMRC no longer send out agent copies of coding notices and you will therefore need to forward these on for checking.
Even if you are happy that your code is correct, do check your payslips to make sure that your employer is using the code that was issued.
50% Taxpayers
Whilst top rate taxpayers with one source of earned income should have paid the right amount of tax through PAYE, those with investment income or more than one employment are likely to have underpaid their tax, because HMRC's system doesn't cope with the necessary coding changes. More taxpayers are finding themselves required to submit a Self Assessment return for 2010/11, and whilst HMRC have said they will try to identify and write to those who are affected, you may wish to seek professional advice on this so you know what your tax position on the 31st January 2012 is likely to be.
Claw back of personal allowance
If you earn more than £100,000 per annum your personal allowance will be clawed back by £1 for every £2 of gross income earned in excess of £100,000. If HMRC are expecting you to receive this level of income then it may be reflected in your tax code but if your income has dropped in the current year then you may be taxed too aggressively. If, on the other hand, your income has increased to over £100,000 when it hadn't been at that level previously then you are likely to pay too little tax through PAYE and this could leave you facing an unexpected tax bill.
If you are concerned about any of the above issues and need advice on whether or not your coding notice is correct, then please do contact your local Wilkins Kennedy office who will be happy to assist you.