Do you Trust Your Tax Code?

22nd March 2010

Recently HMRC have been trying to include everything about your tax affairs into your tax code so that all your tax is collected through the PAYE system and taxpayers would have no liability when filing their Self Assessment returns. As the advert says ‘Tax isn’t meant to be taxing.’

A very nice concept but, as is so often the case, this falls hopelessly short when it comes to reality.

Potential problems include:

• You may be in a different job but your new tax code can include benefits from a job from two years ago, so you could be taxed on the medical insurance benefit that you gave up a year ago.
• HMRC assume that if you were paying higher rate tax in your last tax return, then you will continue to do so. A reasonable assumption but if it is wrong HMRC have gained at your expense at a time when you are earning less – just what you don’t need!
• One-off occurrences such as lump-sum pension contributions or charitable donations could cause you to get a much higher tax code than you should have. The result would be a large unexpected tax bill when you come to do your Self Assessment return.
• Human error at HMRC
• Computer error at HMRC

Why is HMRC issuing new tax codes?

Since January 2010 HMRC have been issuing changes of tax code to many taxpayers for two reasons:

1. Your tax return for 08/09 would have been processed and information from it, such as taxable benefits or income not taxed at the right tax rate, can now be included in your tax code.
2. HMRC have merged two databases to improve the quality of the system. Unfortunately, this is always a recipe for disaster in the short term.

The second database has quite old data on it. I have heard of a number of instances where a new tax code has included combinations for two employments even though one of the employments had ceased many years ago.

Potential Errors on Your Tax Code

HMRC have issued 25 million coding notices this year – last year it was half that. Anecdotal views were that 25% of old tax codes were wrong, so how many of the new ones are wrong?

HMRC have recognised that there is a problem and have issued guidance that taxpayers should carefully check the new tax codes. Again there are problems with this guidance:

• It is on the HMRC website – probably not a place where many people regularly browse. When did you last visit it?
• When most people get tax code changes, they assume it to be correct and ‘file it’ never to see the light of day again.
• HMRC just do not have the resources to deal with queries if millions of people call them.

So, what can you do?

Read the tax code notice carefully and if you don’t understand it, give us a call. It is too late to change your tax code for 09/10 but if you think changes should be made this can be adjusted in your personal tax return which needs to be filed by Jan 2011. Changes for tax codes now being issued for 2010/11 we can of course resolve.

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