• Visitors can check out the Forum FAQ by clicking this link. You have to register before you can post: click the REGISTER link above to proceed. To start viewing messages, select the forum that you want to visit from the selection below. View our Forum Privacy Policy.
  • Want to receive the latest contracting news and advice straight to your inbox? Sign up to the ContractorUK newsletter here. Every sign up will also be entered into a draw to WIN £100 Amazon vouchers!

Noddy PAYE tax code question (nothing to do with IR35!)

Collapse
X
  •  
  • Filter
  • Time
  • Show
Clear All
new posts

    #11
    Originally posted by WTFH View Post
    Basic rate is paid from your personal allowance level up to £50,000, and the higher rate kicks in after that.
    The £50k limit is irrespective of what your personal allowance is.
    OK, thanks. So in this instance the 20% band would be wider, in that it runs from 7,500 to 50,000, rather than 12,500 to 50,000. That's what I meant by "will your 20% tax band expand to £42,500 rather than the normal £37,500" in the original post. Apologies if I wasn't entirely clear, but all seems to make sense now!

    Comment


      #12
      Originally posted by Amanensia View Post
      OK, thanks. So in this instance the 20% band would be wider, in that it runs from 7,500 to 50,000, rather than 12,500 to 50,000. That's what I meant by "will your 20% tax band expand to £42,500 rather than the normal £37,500" in the original post. Apologies if I wasn't entirely clear, but all seems to make sense now!
      The basic rate band is not "up to £50,000". It is defined as £37,500 after allowances. If your personal allowance is higher or lower than the normal you still only get £37,500 of basic rate band above this.

      Income Tax rates and allowances for current and past years - GOV.UK

      A different tax code does not change your allowances.
      Last edited by TheCyclingProgrammer; 16 October 2019, 12:55.

      Comment


        #13
        Originally posted by WTFH View Post
        It's not the "next £37,500" - although it's not helped by me repeating the wrong figure above.

        Personal Allowance Up to £12,500 0%
        Basic rate £12,501 to £50,000 20%
        Higher rate £50,001 to £150,000 40%
        It *is* the next £37,500. The table above is only correct if you have the normal personal allowance.

        Comment


          #14
          In that case, what am I missing in my numerical example above?

          Comment


            #15
            Originally posted by Amanensia View Post
            Let me clarify with a simple example.

            Suppose Joe Bloggs is on a salary of £50k. Everything else is bog-standard, it's the simplest possible scenario.

            If he has a standard tax code of 1250L, he'll pay income tax at the following rates:
            - first 12,500 @ 0%
            - remaining £37,500 @ 20%

            Total tax paid: £7,500.

            Now suppose Joe Bloggs owed £1k from a previous year, and HMRC collect this via PAYE. He'll now get a tax code of 750L, and pay tax as follows:
            - first 7,500 @ 0%
            - next 37,500 @ 20%
            - remaining 5,000 @ 40%

            Total tax paid: £9,500.

            Poor Joe hasn't paid back the £1k he owed, he's paid back £2k. This can't be what happens in practice, so either I've got the way HMRC set the tax code wrong; or the 20% band is expanded by £5,000; or there's a tallying-up at the end of the year to fix it.
            Simple explanation: if Joe Bloggs is a higher rate tax payer, then in order to collect £1k in underpaid tax, HMRC would only need to reduce the tax code by £2500 (i.e. 1000L) because the effect of the reduction in personal allowance *at the PAYE level* will increase the amount of tax paid at the marginal rate, 40% in this case.

            As I said, the tax code does not effect your allowances. Joe Bloggs still has a the full personal allowance. His tax liability is still only £7500 even on the lower tax code of 1000L. The lower tax code simply results in a £1k overpayment of tax for that year, which is used to offset the underpayment of tax in the previous year.

            Comment


              #16
              Yep - but HMRC won't necessarily know in advance whether he's paying higher rate for the current year (he may have been slightly lower paid last year etc.) So presumably in this instance, if the tax code was amended based on a non-higher-rate assumption but in fact the amended code meant he is now paying unexpected higher rate tax, there would be a correction at year end (probably via SA)?

              Comment


                #17
                Yes, if as a result of a tax code adjustment Joe Bloggs has overpaid tax after accounting for underpaid tax from previous years then he would be entitled to a refund at the end of the tax year. If he submits a tax return it will figure this out.

                Comment


                  #18
                  Thanks, sorry for dragging this one out. Particularly as it was only idle curiosity!

                  Comment

                  Working...
                  X