Just switched to Ltd and my Tax Code for 2013/14 is 75L. Implications?

[Daventry]

Hi,

After 2 years contracting through an umbrella company, I have set up my Ltd. However my account says that since this not one of the standard tax codes I can not pay myself a director's salary and only pay myself through dividends.

Is this true?

How hard would it be to get HMRC to assign me basic 944L tax code?

Regards.

[Clare@InTouch]

You can pay yourself whatever you like - a lower tax code just means you'll start paying tax at a lower level of £750 rather than £9,440. Therefore it may not be tax efficient, and you may be better off just taking dividends.

You should have received a coding notice from HMRC that will tell you why your code is so low - do you recall getting one? If the adjustments HMRC have made are incorrect then you can simply call them and ask them to adjust it. It'll take a few weeks, but should be done easily enough.

[Daventry]

You can pay yourself whatever you like - a lower tax code just means you'll start paying tax at a lower level of £750 rather than £9,440. Therefore it may not be tax efficient, and you may be better off just taking dividends.

You should have received a coding notice from HMRC that will tell you why your code is so low - do you recall getting one? If the adjustments HMRC have made are incorrect then you can simply call them and ask them to adjust it. It'll take a few weeks, but should be done easily enough.

Sorry I made a mistake : They have assigned me a 75T code - with T rather than L. According to their website, it means there are items that need to be reviewed. Last year I was asked to complete a SATR for 2011/12 and now have received another request for a 2012/13 SATR along with the 75T code.

BTW can anyone update the thread title to reflect the correct code?

[Clare@InTouch]

Sorry I made a mistake : They have assigned me a 75T code - with T rather than L. According to their website, it means there are items that need to be reviewed. Last year I was asked to complete a SATR for 2011/12 and now have received another request for a 2012/13 SATR along with the 75T code.

BTW can anyone update the thread title to reflect the correct code?

The letter doesn't effect the tax allowance - it'll still be £750 tax free until the code is reviewed and amended. Just call HMRC and ask what's included in the code, they should be able to tell you and amend it over the phone.

[LisaContractorUmbrella]

Clare is absolutely right - it is certainly not beyond the realms of possibility that HMR&C have made a mistake but it may also be that they believe that you have underpaid tax in the previous year(s). Did your accountant offer advice in completing your SATR? If so they may be able to shed some light on it although tbh it doesn't sound as though they have been particularly helpful so far.

[Brett at Nixon Williams]

Although you will most likely pay tax on the salary you take during the tax year on a code of 75T, you will still have a standard £9,440 personal allowance for the year.

Upon completion of your Self Assessment tax return for the year you will find that any tax overpaid at source on the salary would be refunded, or offset against tax falling due on other income. For example, dividend income in excess of the higher rate threshold (total gross income in excess of £41,450 for 2013/14).

Remember that paying a salary would attract Corporation Tax relief and therefore paying a low salary would be tax efficient in most cases.

I hope this helps.

Brett

[LisaContractorUmbrella]

Although you will most likely pay tax on the salary you take during the tax year on a code of 75T, you will still have a standard £9,440 personal allowance for the year.

Upon completion of your Self Assessment tax return for the year you will find that any tax overpaid at source on the salary would be refunded, or offset against tax falling due on other income. For example, dividend income in excess of the higher rate threshold (total gross income in excess of £41,450 for 2013/14).

Remember that paying a salary would attract Corporation Tax relief and therefore paying a low salary would be tax efficient in most cases.

I hope this helps.

Brett

On a 75T code he will have a personal allowance before tax becomes payable of £750 not £9440

[Daventry]

On a 75T code he will have a personal allowance before tax becomes payable of £750 not £9440

Ok so what I have to do is ask HMRC to give me a standard tax code. I assume this will take weeks or even months.

Then next year I can submit a SATR for 2013/14 and get back all the overpaid tax.

Now I wonder whether my accountant can't deal with this case because their system is not flexible enough. I have been told they can run a payroll for me (if I pay them £9.95+VAT per month).

[Brett at Nixon Williams]

I agree, during the year tax will be payable on earnings above £750. Assuming that the code contains incorrect adjustments as it was suggested (and is often the case) tax would be collected when not applicable, assuming the earnings do not exceed the standard allowance of £9,440. I assume the £9,440 would not be restricted i.e. adjusted net income does not exceed £100k.

If the code is not adjusted to a standard 944L before the end of the year, tax overpaid at source on any salary taken would be refunded or offset against tax due on other income, if applicable when the Self Assessment tax return is completed.

Of course if the adjustments to the code are correct, to allow for benefits or underpaid tax from an earlier year then the £750 allowance would be correct.

Brett

[LisaContractorUmbrella]

Ok so what I have to do is ask HMRC to give me a standard tax code. I assume this will take weeks or even months.

Then next year I can submit a SATR for 2013/14 and get back all the overpaid tax.

Now I wonder whether my accountant can't deal with this case because their system is not flexible enough. I have been told they can run a payroll for me (if I pay them £9.95+VAT per month).

Yes, speak to HMR&C and ask why this code has been issued - they should then send you a breakdown which will show what, if anything, they are trying to recoup. Shouldn't take too long tbh