Brits are being urged to check their payslips as HM Revenue & Customs (HMRC) collect an estimated £5.8 billion in overpaid tax. This enormous error is mainly due to incorrect tax codes being assigned to individuals.
According to a recent study by Canada Life, nearly a third of British adults have been given the wrong tax code, including around 6% in the last year alone. Among those with incorrect tax codes, the average overpayment is around £689 per year, totalling £5.8 billion.
HMRC Tax Code
A tax code is a combination of numbers and letters used by HMRC to determine how much tax you have to pay on your income. Although it may sound complicated, understanding your tax code is essential to ensure you don't pay too much tax.
Generally, the tax code represents your tax-free income up to the limit of the personal allowance, which is currently £12,570 a year. For instance, the most common tax code is 1257L, which applies to single sources of income such as employment or pensions.
The digits in the tax code represent your non-taxable income, while the letters indicate the particular circumstances that affect your non-taxable allowance. Scottish tax codes, for example, start with 'S' and Welsh tax codes start with 'C'.
John Chew, tax and estate planning specialist, reckons that checking your tax code is 'vital' as it determines how much tax you owe. An incorrect tax code could leave you paying more tax than you need to, or even facing an unexpected tax bill.
John points out that a different tax code is needed for each source of income received, whether it's work or a pension. If employment benefits, such as a company car or healthcare, are received, the tax code may be different from the norm.
Therefore, it is in your interest to check that your tax code is correct. If your tax code appears to be incorrect, you need to contact HMRC directly, as employers are not able to rectify these errors.
HMRC is probably already aware of any discrepancies and will send people a P800 Tax Calculation form or a simple assessment letter by 5th April each year. These documents will indicate whether you owe tax or are entitled to a refund.
Anyone who has paid excessive tax because of an incorrect tax code has four years in which to claim the money back. It is recommended that you deal with any potential problems with your tax code as soon as possible.
For those of you unsure of your tax code, you can find it on your payslip, on form P45 if you leave your job, or on form P60 at the end of the tax year. You can also check your tax code online on the government website.
