New tax year, new tax code
As the 2021/22 tax year has begun, HMRC have been issuing new tax codes where applicable.
The personal allowance has increased from £12,500 to £12,570. A a result, it is necessary to update employee tax codes for the new tax year – 1257L.
What the below information will highlight is:
what you should be checking if you HAVE received a new tax code
if you should be contacting HMRC for a new tax code if you HAVEN’T received one
If you receive a salary, bonus or other taxable income, the amount of tax you pay is worked out according to your tax code. It isn’t necessarily the final amount of tax payable on that income but the more accurate your tax code, the nearer it will be to being correct and less likely to face a tax assessment when HMRC make it’s annual renewal.
You’ll have a different tax code for each paid employment/private pension you receive. The codes allocate how your tax-free allowances and deductions are applied to each source of income.
If someone has two paid jobs, a part time which pays £500 per month and the other as a director of their own company but the salary from their own company is the greater but varies significantly from month to month, they would be entitled to the standard tax-free personal allowance (£12,570 for 2021/22) but no other reliefs.
If HMRC allocates all these to that persons tax code for their part-time job, only £6,000 (£500 x 12) would be used and as a result they would overpay tax on their directorship salary.
It’s your decision how to allocate your tax allowances etc. For example, if you know that your income will only use £6,000 of your allowance, you can ask HMRC to issue a code that only gives you that amount. If your pay then exceeds this it just means you’ll pay a little tax on the excess. The balance of you tax allowance can be given in the tax code for your directorship.
However, there is a possibility HMRC might not agree to this if the income from each job varies widely as this may result in too much tax being paid at the basic rate when some should be at higher rates.
Make sure that if you live in Scotland your tax code starts with an S and if you live in Wales your tax code starts with a C. Different income tax rates apply to Scottish taxpayers and may do so in future for Wales. The prefix ensures the correct tax rates are used against your salary, pension, etc.
Adderley, Hill & Co Team
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