Home Finance Tax code check urged as common error could mean you needlessly pay...

Tax code check urged as common error could mean you needlessly pay 60% tax


Britons have been urged to check their tax code is correct as a common occurrence could result in an extra HMRC bill for thousands of pounds.

Experts at wealth firm Killik & Co have urged people to check their code as they could be dragged into an effective 60% tax bracket.

The group warned that you may unknowingly find yourself in this situation if you receive a bonus as part of your job.

Sarah Hollowell, Head of Tax and Trustee Services, explained: “Under the current code system, an employee’s pay for the whole tax year is estimated from the information supplied each month.

“This means that if someone receives a bonus, and therefore has an unusually high salary for one month, HMRC’s systems will take this to be 1/12th of their annual salary and may re-issue a tax code on the assumption that their pay has increased.

Ms Hollowell went on to explain how this could drag you into paying a huge 60% tax. She said: “if your total salary for one month implies you annually earn £100,000 or over, you could end up paying an effective tax rate of 60 percent tax on your earnings.

“This is because once an individual earns over £100,000, their annual allowance begins to fall due to the ‘personal allowance taper’.

“Essentially, for every £2 you earn over £100,000, your personal allowance is reduced by £1, meaning that once you earn £125,140 or more, your allowance disappears entirely.

“As a result, a bonus one month could skew HMRC’s view of what your annual salary is, and cause them to issue an incorrect tax code.

“If you think this may affect you, it’s important to check any new tax codes received and flag any errors to HMRC to avoid paying too much tax.”

The standard personal allowance entitles a person to earn up to £12,570 a year without paying income tax. You then pay 20 percent on income between £12,571 and £50,270, and 40 percent on income between £50,271 to £125,140.

Once your income exceeds £125,140, your pay 45 percent tax on your income and your personal allowance is entirely removed.

You can find your tax code on your payslip, on a P45 or on a P60, as well as on a pension advice slip. The most common tax code is 1257L, meaning you get the full tax-free personal allowance.

Ms Hollowell encouraged workers to regularly check their payslip to make sure their code is correct. She urged: “Make it a habit to confirm that the correct amount of tax is being deducted, and be sure to contact HMRC if you spot any discrepancies.”

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