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TAX AND EMPLOYMENT
In this section we consider some of the most important tax issues for both employers and employees.
Is your tax code correct?
The purpose of the PAYE system is to collect the right amount of tax from earnings throughout the course of the year. Employers use tax codes to work out how much tax to deduct from an employee's earnings.
However, if individuals have an incorrect tax code, they can pay the wrong amount of tax – either
too much or, perhaps more worryingly, too little. Individuals should check their PAYE code regularly as it is much easier to rectify mistakes before the tax year ends. The code in use will be shown on the current payslip.
The letter in the code indicates whether the code includes one of the standard allowances. The letters are as follows:
L – includes the basic personal allowance
N – taxpayers who are ‘transferors’ of the Marriage
Allowance
M – taxpayers who are ‘recipients’ of the Marriage Allowance
T – there is usually an adjustment in your code which requires manual checking by HMRC each year – for example, you might have a tax underpayment being ‘coded out’
K – HMRC may try to increase the tax you pay on one source of income to cover the tax due on another source which cannot be taxed directly. A ‘K’ code applies when the ‘other income’ adjustment reduces your allowances to less than zero – in effect, it means that the payer has to add notional income to your real income for PAYE purposes.
The maximum tax which can be deducted is 50% of the source income.
HMRC will often try to collect tax on other income through your PAYE code, but you may prefer to pay the tax through self assessment. For more information on this, please contact us, as we can arrange for the adjustment to be removed.
If you are resident in Scotland you will pay Scottish income tax. In such cases, your code will start with an ‘S’ to tell your employer to deduct tax using the Scottish income tax rates and bands on your pay.
If you are resident in Wales you pay the Welsh rates of income tax. The codes for Welsh taxpayers begin with a ‘C’.
Dynamic coding
HMRC uses information received from employers, such as notification of a new benefit, to recalculate employee tax codes in real-time. Where a potential
underpayment is identified, HMRC makes an in-year adjustment to the code for the current tax year (so- called 'dynamic coding'), rather than waiting until the following tax year.
Employer loans
Where loans from an employer total more than £10,000 at any point during the tax year, tax is chargeable on the difference between any interest actually paid and interest calculated at the official rate of 2%. Please contact us for the latest position.
Expense payments
Expense payments are generally exempt, and do not need to be reported to HMRC on a form P11D. However, expense payments can still be subject to review from time to time, including during an employer compliance visit from HMRC.
You may be able to claim tax relief for other expenses you incur in connection with your job, but the rules are fairly restrictive.
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Tax and Employment