For those in employment or receiving a pension, a PAYE code is that usually benign and often ignored communique from our masters at HM Revenue & Customs which, apart from the new annual statements of how your taxes have been spent, may be the only communication that you receive from HMRC on an annual basis.
However, ensuring that your PAYE code is as accurate as possible prevents overpayments of tax accruing (which you may then find you are out of time to correct), can prevent unexpected underpayments of tax appearing and enables better cash flow for your income.
So how can you make the PAYE code work for you? Here are a few things to check to ensure that your PAYE code is working efficiently.
Firstly, make sure that the code is actually based on correct figures. Where a PAYE code contains any restrictions for untaxed income or benefits, it may only be an intelligent estimate by the Inspector, and can be more than 18 months out of date too. If you know that the level of, say, your investment income has dropped during the year, instead of waiting until your annual Tax Return is processed, by contacting the Revenue sooner, it should be possible to make changes and obtain a better cash flow. Likewise, if you know the level of your benefits has increased, you may find that you are accruing a tax liability if a PAYE code benefit restriction is too low.
Secondly, HMRC use your PAYE code to allow you to settle liabilities for earlier years (thus spreading payment over twelve months) and also to try to collect potential liabilities that they believe you may have. This latter point has become more widespread in recent years with HMRC including items such as rent receivable into your code in order to obtain any tax a lot sooner than they would otherwise using direct payment – another reason for ensuring that you check your PAYE code for accuracy.
Next, does the PAYE code contain all of the allowances that you can claim? The new Married Allowance transfer (effective from 2015/16) enables the transfer of 10% of the Personal Allowance from one spouse to another where it may otherwise go unused. Here the 10% allowance is gifted from the spouse whose income is below the level of their personal allowance to the one with the higher income (provided that they are a Basic Rate taxpayer). For those under PAYE, the recipient should see this additional allowance in the PAYE code
Finally, are you claiming all of the expenses that you are entitled to? This should not only include any subscriptions to professional societies that you pay personally but also any additional allowances for the type of work you do.
Over several years, HMRC have agreed additional allowances (flat rate expenses) for people in various professions – something that quite a number of employees, especially those working in smaller firms, are often unaware of. Depending on your trade and industry, the Inspector will grant allowances in order to take into account the cost or upkeep of specialist clothing or tools. For example, motor mechanics (in garages) may claim up to £100 pa, farm labourers £70pa, Plumbers (Heating Engineers) £100 pa, those in the food industry £45pa and scaffolders £115 pa. This list is by no means exhaustive and the full list is available on HM Revenue & Customs’ website. The amount you are entitled to claim will depend on your particular financial circumstances, the trade and industry in which you work and whether you are required to incur a cost in the upkeep for your clothing or tools. If you haven’t been claiming these allowances in the past, depending on your circumstances, you may be able to reclaim past allowances for previous tax years.
With regular attention to your PAYE code, you should be able to maximise your net income and reduce any future tax problems. For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.