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Are you paying too much tax?
Ruth Jackson explains why it is important to make sure the tax man has you on the right tax code.
The chances are you haven't looked at your tax code in years. That could mean you have been overpaying the taxman. HM Revenue & Customs (HMRC) admits it regularly makes mistakes on tax codes the little string of letters and numbers that dictates how much tax is taken from your income. For example, insurer Royal London has claimed that as many as 800,000 pensioners are paying too much tax due to incorrect codes. Thousands of workers could also discover their code is wrong.
"Most people are understandably baffled by the whole system of tax codes," says Steve Webb, the former pensions minster, who now works at Royal London. "Employers and pension providers are issued with tax codes by HMRC and we generally assume they must be right. But HMRC can get things wrong and it is important that individuals understand their tax code and how to spot mistakes and get things right."
The first step in fixing this is to check your current tax code. The start of the new tax year means that HMRC will have issued the 41 million people in the pay as you earn (PAYE) system with an up-to-date tax code. You should receive a letter from HMRC detailing your tax code otherwise it will appear on your pay slip. However, if you are self-employed and pay income tax via self-assessment, you may not have a tax code, as they are issued to people who have income tax automatically deducted.
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Once you've got your code, you need to decipher it. The numbers in the code relate to how much money you can earn before income tax is due but to complicate matters HMRC knocks off the last digit. So, if your tax code is 1150L, then you can earn the standard personal allowance of £11,500 between 6 April 2017 and 5 April 2018 before you have to start paying income tax.
The letters give extra information on your individual tax status. The most common abbreviations are shown in the column on the right. If you've checked your code and think that there is a mistake, you will need to contact HMRC in order to resolve it. You can do this by calling 0300-200 3300 or visiting Gov.uk.
A jargon buster for your tax code
The letters in your tax code give you further information about what the code means and how it's calculated. The following are the most common:
L The most common code. This simply means you are entitled to the standard tax-free personal allowance.
BR All income from this job or pension is subject to income tax at the basic rate (20%). This means you've used up your personal allowance elsewhere, so you should only see this code if you have a second job or source of income.
D0 The higher rate of income tax (40%) is due on all income from this source.
D1 The top rate of income tax (45%) is due on all income from this source.
K The tax you owe is higher than the personal allowance. If you have this letter, then the preceding numbers show how much tax you owe, not how much tax-free cash you can earn.
M You pay less tax because you are in receipt of the marriage allowance.That means your spouse or civil partner has transferred 10% of their personal allowance to you.
NT Income from this source is not liable for any income tax.
0T You've used up your personal allowance. All income from this source will be taxed. The rate depends on how much you earn (unlike the BR, D0 and D1 codes, which specify the tax rate).
T Your tax code has been affected by other calculations to work out your personal allowance. For example, your personal allowance has been reduced because you earn more than £100,000.
In the news this week
Anyone coping with a mental health issue shouldn't hope for much compassion from the financial services industry, says Kara Gammell in The Sunday Times. A quarter of adults experience mental illness, but according to an investigation by the newspaper, if you tell an insurer about any episodes your premium could treble, or you could even be refused cover. Omit to mention it, however, and you risk having a claim rejected. Many insurance policies are affected from travel to car insurance but income-protection and life-insurance policies are generally the worst because of the high number of claims. A history of mental illness can result in income-protection policies rising by up to 200%, and for life insurance, premiums can double, according to specialist advisers.
If you're about to book your summer holiday, watch out, says Sean Poulter in the Daily Mail. A study that checked the online prices of ten holidays to be taken in August found that trips rose or fell by hundreds of pounds from one day to the next, with the price of one trip to Florida soaring £3,370 in just one day, before falling again the day after. To avoid paying over the odds, AOL's Sarah Coles recommends shopping around over a number of days to get a feel for what the cost should be. Ideally, however, you should book at least six months in advance.
Be careful when booking travel insurance if someone you are travelling with has a pre-existing medical condition, warns Amelia Murray in The Daily Telegraph. One reader, who cancelled his holiday due to a recurrence of his wife's cancer, was surprised when Barclays refused to reimburse him. The bank gave as a reason that they had previously refused insurance to his wife, due to her pre-existing condition. The bank apologised for not making it clear that this would also mean the husband could not claim in the future for anything relating to his wife's medical history. Insurers have a "moral and ethical obligation" to inform customers if certain circumstances, such as a relative's illness, would affect their cover, says consumer-rights service Resolver.
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Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.
