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Your tax code number is used to figure out how much PAYE tax you must pay if you receive any amount of taxable income from your employment. This isn’t necessarily the ultimate amount of tax due on that income, but the more precise your tax code, the nearer it will be to the right answer. Correcting your code reduces the likelihood that you will face a tax assessment when HMRC does its annual review (typically in the fall), that you will owe tax on your self-assessment, or that you will pay too much tax and need to seek a refund.
HMRC is responsible for ensuring you don’t pay too much tax and collect the right taxes. To achieve this, they regularly change tax codes or make updates. These can directly affect your salary and can cause problems such as underpayment or overpayment of your tax. Nowadays, HMRC is busy providing PAYE codes for 2022-23. But a recent First-tier Tribunal (FTT) judgement reminds us of what HMRC may put in your tax code. So what was the ruling’s main point?
Richard Thomas was a tax tribunal judge until retiring in 2020. He objected to HMRC changing his tax code for his civil service pension in late 2020. It did so to collect approximated tax payable on a payment Mr Thomas got from the civil service after he left work and for which a P45 was issued. The payment included basic rate tax, but HMRC assumed Mr Thomas was subject to the higher rate. Mr Thomas appealed to the FTT, claiming HMRC couldn’t determine how much tax it would collect under the amended code.
A narrow victory: After some communication, HMRC restored the PAYE code (kind of) and dropped its FTT claim. , nevertheless, persisted in his appeal. The FTT decided it had the right, but not the obligation, to determine the proper code. It seems to be a gain for the taxpayer. But HMRC had already restored the code T, so he gained nothing. It also agreed with HMRC that it had the right to change Mr Thomas’s code, even if it afterwards reversed itself.
Despite the hearing’s lack of relevance, it serves as a reminder that you may appeal a code number to the FTT. When computing your code, HMRC is constrained by rules, which it increasingly ignores.
As a general rule, HMRC can only change your tax code to collect taxes on income paid through PAYE, such as state and private pensions, benefits in kind, and other income. It may also update your code to collect the tax you owe or anticipate for the current tax year. HMRC employees often seek to utilise codes to collect tax on a wide income range despite the rules. While it is legal, you do not have to accept what amounts to collecting tax before it is due. You have the right to apply HMRC to exclude the following things from tax codes when they appear frequently:
- Property Income
- Self Employment
- Interest and Dividends
- Investment income
Keep in mind that, although your tax code influences the amount of PAYE tax taken from your employment income or private pension, your actual tax due is established by your self-assessment or HMRC review. Nevertheless, there is no reason to accept a questionable tax code that results in you paying tax sooner than you need to.