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Previously on "Noddy PAYE tax code question (nothing to do with IR35!)"
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Thanks, sorry for dragging this one out. Particularly as it was only idle curiosity!
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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.
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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)?
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Originally posted by Amanensia View PostLet 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.
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.
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Originally posted by WTFH View PostIt'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%
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Originally posted by Amanensia View PostOK, 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!
Income Tax rates and allowances for current and past years - GOV.UK
A different tax code does not change your allowances.Last edited by TheCyclingProgrammer; 16 October 2019, 12:55.
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Originally posted by WTFH View PostBasic 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.
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Originally posted by WTFH View Poste.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%
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.
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Originally posted by WTFH View PostYou are JtB and I claim my £5.
So actually.. yes you are probably right.
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Originally posted by Amanensia View PostLet 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.
It's not the "next £37,500" - although it's not helped by me repeating the wrong figure above.
Basic rate is paid from your personal allowance level up to £50,000, and the higher rate kicks in after that.Personal Allowance Up to £12,500 0% Basic rate £12,501 to £50,000 20% Higher rate £50,001 to £150,000 40%
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%
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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.
Leave a comment:
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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.
Leave a comment:
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