Reply to: Noddy PAYE tax code question (nothing to do with IR35!)

[Amanensia]

Thanks, sorry for dragging this one out. Particularly as it was only idle curiosity!

[TheCyclingProgrammer]

Yes, if as a result of a tax code adjustment Joe Bloggs has overpaid tax after accounting for underpaid tax from previous years then he would be entitled to a refund at the end of the tax year. If he submits a tax return it will figure this out.

[Amanensia]

Yep - but HMRC won't necessarily know in advance whether he's paying higher rate for the current year (he may have been slightly lower paid last year etc.) So presumably in this instance, if the tax code was amended based on a non-higher-rate assumption but in fact the amended code meant he is now paying unexpected higher rate tax, there would be a correction at year end (probably via SA)?

[TheCyclingProgrammer]

Let me clarify with a simple example.

Suppose Joe Bloggs is on a salary of £50k. Everything else is bog-standard, it's the simplest possible scenario.

If he has a standard tax code of 1250L, he'll pay income tax at the following rates:
- first 12,500 @ 0%
- remaining £37,500 @ 20%

Total tax paid: £7,500.

Now suppose Joe Bloggs owed £1k from a previous year, and HMRC collect this via PAYE. He'll now get a tax code of 750L, and pay tax as follows:
- first 7,500 @ 0%
- next 37,500 @ 20%
- remaining 5,000 @ 40%

Total tax paid: £9,500.

Poor Joe hasn't paid back the £1k he owed, he's paid back £2k. This can't be what happens in practice, so either I've got the way HMRC set the tax code wrong; or the 20% band is expanded by £5,000; or there's a tallying-up at the end of the year to fix it.

Simple explanation: if Joe Bloggs is a higher rate tax payer, then in order to collect £1k in underpaid tax, HMRC would only need to reduce the tax code by £2500 (i.e. 1000L) because the effect of the reduction in personal allowance *at the PAYE level* will increase the amount of tax paid at the marginal rate, 40% in this case.

As I said, the tax code does not effect your allowances. Joe Bloggs still has a the full personal allowance. His tax liability is still only £7500 even on the lower tax code of 1000L. The lower tax code simply results in a £1k overpayment of tax for that year, which is used to offset the underpayment of tax in the previous year.

[Amanensia]

In that case, what am I missing in my numerical example above?

[TheCyclingProgrammer]

It's not the "next £37,500" - although it's not helped by me repeating the wrong figure above.

Personal Allowance	Up to £12,500	0%
Basic rate	£12,501 to £50,000	20%
Higher rate	£50,001 to £150,000	40%

It *is* the next £37,500. The table above is only correct if you have the normal personal allowance.

[TheCyclingProgrammer]

OK, thanks. So in this instance the 20% band would be wider, in that it runs from 7,500 to 50,000, rather than 12,500 to 50,000. That's what I meant by "will your 20% tax band expand to £42,500 rather than the normal £37,500" in the original post. Apologies if I wasn't entirely clear, but all seems to make sense now!

The basic rate band is not "up to £50,000". It is defined as £37,500 after allowances. If your personal allowance is higher or lower than the normal you still only get £37,500 of basic rate band above this.

Income Tax rates and allowances for current and past years - GOV.UK

A different tax code does not change your allowances.

[Amanensia]

Basic rate is paid from your personal allowance level up to £50,000, and the higher rate kicks in after that.
The £50k limit is irrespective of what your personal allowance is.

OK, thanks. So in this instance the 20% band would be wider, in that it runs from 7,500 to 50,000, rather than 12,500 to 50,000. That's what I meant by "will your 20% tax band expand to £42,500 rather than the normal £37,500" in the original post. Apologies if I wasn't entirely clear, but all seems to make sense now!

[TheCyclingProgrammer]

e.g. your tax code is 100L
You get £1,000 tax free. Your next £49k is at 20%, and from £50,001 upwards you pay 40%

e.g. your tax code is 2250L
You get £22,500 tax free. Your next £27.5k is at 20%, and from £50,001 upwards you pay 40%

e.g. your tax code is 0L
You get £0 tax free. Your next £50k is at 20%, and from £50,001 upwards you pay 40%

I repeat: your tax code != your personal allowance, it only affects how your tax is calculated via PAYE.

You could have a tax code higher than the personal allowance to reflect some additional allowances (expenses usually) or it could be less as you owe underpaid tax. Your personal allowance remains the same.

[northernladuk]

You are JtB and I claim my £5.

I just didn't think my clever response was getting the attention it deserved..

So actually.. yes you are probably right.

[WTFH]

Why is Noddy paying tax? The Diddymen didn't.

Tell him to ask his accountant.

Why is Noddy paying tax? The Diddymen didn't.

You are JtB and I claim my £5.

[northernladuk]

Why is Noddy paying tax? The Diddymen didn't.

[WTFH]

Let me clarify with a simple example.

Suppose Joe Bloggs is on a salary of £50k. Everything else is bog-standard, it's the simplest possible scenario.

If he has a standard tax code of 1250L, he'll pay income tax at the following rates:
- first 12,500 @ 0%
- remaining £37,500 @ 20%

Total tax paid: £7,500.

Now suppose Joe Bloggs owed £1k from a previous year, and HMRC collect this via PAYE. He'll now get a tax code of 750L, and pay tax as follows:
- first 7,500 @ 0%
- next 37,500 @ 20%
- remaining 5,000 @ 40%

Total tax paid: £9,500.

Poor Joe hasn't paid back the £1k he owed, he's paid back £2k. This can't be what happens in practice, so either I've got the way HMRC set the tax code wrong; or the 20% band is expanded by £5,000; or there's a tallying-up at the end of the year to fix it.

No, you've got it wrong.

It's not the "next £37,500" - although it's not helped by me repeating the wrong figure above.

Personal Allowance	Up to £12,500	0%
Basic rate	£12,501 to £50,000	20%
Higher rate	£50,001 to £150,000	40%

Basic rate is paid from your personal allowance level up to £50,000, and the higher rate kicks in after that.
The £50k limit is irrespective of what your personal allowance is.

e.g. your tax code is 100L
You get £1,000 tax free. Your next £49k is at 20%, and from £50,001 upwards you pay 40%

e.g. your tax code is 2250L
You get £22,500 tax free. Your next £27.5k is at 20%, and from £50,001 upwards you pay 40%

e.g. your tax code is 0L
You get £0 tax free. Your next £50k is at 20%, and from £50,001 upwards you pay 40%

[TheCyclingProgrammer]

Don't confuse PAYE tax codes with tax bands and allowances as they aren't the same thing.

Changing your tax code does not change your personal allowance or the tax bands, it simply changes how much tax is collected via PAYE at the point of being paid. It doesn't affect your tax liability for the year, it simply increases the amount HMRC collect to make up for the previous year's shortfall.

[Amanensia]

Let me clarify with a simple example.

Suppose Joe Bloggs is on a salary of £50k. Everything else is bog-standard, it's the simplest possible scenario.

If he has a standard tax code of 1250L, he'll pay income tax at the following rates:
- first 12,500 @ 0%
- remaining £37,500 @ 20%

Total tax paid: £7,500.

Now suppose Joe Bloggs owed £1k from a previous year, and HMRC collect this via PAYE. He'll now get a tax code of 750L, and pay tax as follows:
- first 7,500 @ 0%
- next 37,500 @ 20%
- remaining 5,000 @ 40%

Total tax paid: £9,500.

Poor Joe hasn't paid back the £1k he owed, he's paid back £2k. This can't be what happens in practice, so either I've got the way HMRC set the tax code wrong; or the 20% band is expanded by £5,000; or there's a tallying-up at the end of the year to fix it.