Are you on the right tax code?

5 July 2013


I have for the past two tax years had problems with my tax coding. The first was 2011/2012 and I was told by HM Revenue & Customs (HMRC) that this was due to the fact that it did not have a correct record of my earnings, even though I submitted a copy of my P60 for that year.This year's problem is due to an annuity coming into payment in March. This is a relatively small annuity but is enhanced due to my ill health. HMRC has decided that it is deducting 40% tax from it and states that I owe £186 approximately from the last tax year - I have been given a higher tax code on my pension to trawl this money back. Can you help sort all this out?
Francis Norgrove, Slough


Frances believes that she has been paying 40% tax when she shouldn't have been and HMRC has put her on the wrong code because she is earning income from an enhanced annuity. After Moneywise's intervention, HMRC found that Frances is actually on the wrong code, and it is now speaking to her to get the correct details of her income and ensure she and her pension provider have the correct tax code.

According to HMRC, it was her enhanced annuity which caused her to go into the higher tax bracket. A spokesman said: "We based the tax code on an estimated income that we held for the previous tax year. When notification of the new pension was received, an estimated income was again used for this pension. This source of income then pushed her into the higher tax band."

While HMRC has yet to fully unravel this knot and put you on the correct tax code, there is good news - you may not have to make the £186 payment. HMRC says it is now reviewing whether this is still due.

The spokesperson added: "I'm sorry for the inconvenience and stress that has been caused to Miss Norgrove. This is not the level of service HMRC aims to provide. We are currently reviewing the details in order to resolve the issue as quickly as possible."

Make sure you are paying the right tax code

You could be losing out on thousands of pounds a year by being in the wrong tax code, so check to make sure it's correct. But remember: if you ask HMRC to investigate, it could find that you need to pay more tax and revise your tax code upwards. Try these three tips to stay on top of your tax code:

Record keeping

HMRC recommends you keep important information and paperwork about your tax for future reference. This includes payslips, PAYE coding notices, statements of account, bank statements, and dividend vouchers. You should also keep any correspondence you have had with HMRC.

Use HMRC's tax calculator

HMRC has an income tax 'quick check' calculator, which allows you to see whether your tax code is correct. For this, you'll need your pre-tax earnings for the tax year, the total tax you paid on your earnings for the year, the amount of interest from your savings accounts after tax, and the total tax you paid on these saving accounts.

Correct details

You should always inform HMRC of any changes to your circumstances, which could affect the amount of income tax you pay. This includes: if you get married; you start to receive a second income; you become or stop being self-employed; you start to get company benefits, such as a company car; or you start to get a state pension.

If you are sure you're on the wrong tax code, you can ring HMRC on 0300 200 3300 or contact it via its website. If in doubt, you could always employ the services of an accountant before you speak to HMRC. The upfront cost could end up saving you a lot of money.