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

    I really should understand this sort of thing after 20 years contracting but.....! It's never really occurred to me to look into it. Not very important at all but just made me curious.

    Suppose HMRC want to recover £1k of unpaid taxes via someone's tax code. It appears that they'd change the tax code from, say, 1250L to 750L, giving £5k more taxable at 20%. All fine and dandy. However does this reduction in the tax allowance get automatically added back to the 20% band?

    In other words, if you have a code of 750L, will your 20% tax band expand to £42,500 rather than the normal £37,500, so that 40% doesn't "kick in early"? Or does it stay at £37,500 and the excess tax (assuming you're earning more than £45k) gets fixed at the end of the tax year?

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    Prof Cunning @ Oxford Uni

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    Quote Originally Posted by Amanensia View Post
    I really should understand this sort of thing after 20 years contracting but.....! It's never really occurred to me to look into it. Not very important at all but just made me curious.

    Suppose HMRC want to recover £1k of unpaid taxes via someone's tax code. It appears that they'd change the tax code from, say, 1250L to 750L, giving £5k more taxable at 20%. All fine and dandy. However does this reduction in the tax allowance get automatically added back to the 20% band?

    In other words, if you have a code of 750L, will your 20% tax band expand to £42,500 rather than the normal £37,500, so that 40% doesn't "kick in early"? Or does it stay at £37,500 and the excess tax (assuming you're earning more than £45k) gets fixed at the end of the tax year?
    No, the tax bands don’t change at the upper end, and there’s no “fixing at the end of the year”
    20% kicks in based on your tax code.
    40% kicks in at £50,001 irrespective of your tax code.

    Not sure what you mean by “excess tax”
    Last edited by WTFH; 16th October 2019 at 11:29. Reason: edited as I had the wrong value for the 40% band
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    Why is Noddy paying tax? The Diddymen didn't.

    Tell him to ask his accountant.
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    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.

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    Don't confuse PAYE tax codes with tax bands and allowances as they aren't the same thing.

    Changing your tax code does not change your personal allowance or the tax bands, it simply changes how much tax is collected via PAYE at the point of being paid. It doesn't affect your tax liability for the year, it simply increases the amount HMRC collect to make up for the previous year's shortfall.

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    Prof Cunning @ Oxford Uni

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    Quote 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.
    No, you've got it wrong.

    It's not the "next £37,500" - although it's not helped by me repeating the wrong figure above.

    Band Taxable income Tax rate
    Personal Allowance Up to £12,500 0%
    Basic rate £12,501 to £50,000 20%
    Higher rate £50,001 to £150,000 40%
    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.

    e.g. your tax code is 100L
    You get £1,000 tax free. Your next £49k is at 20%, and from £50,001 upwards you pay 40%

    e.g. your tax code is 2250L
    You get £22,500 tax free. Your next £27.5k is at 20%, and from £50,001 upwards you pay 40%

    e.g. your tax code is 0L
    You get £0 tax free. Your next £50k is at 20%, and from £50,001 upwards you pay 40%
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    Why is Noddy paying tax? The Diddymen didn't.
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    Quote Originally Posted by northernladuk View Post
    Why is Noddy paying tax? The Diddymen didn't.

    Tell him to ask his accountant.
    Quote Originally Posted by northernladuk View Post
    Why is Noddy paying tax? The Diddymen didn't.

    You are JtB and I claim my £5.
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    Quote Originally Posted by WTFH View Post
    You are JtB and I claim my £5.
    I just didn't think my clever response was getting the attention it deserved..

    So actually.. yes you are probably right.
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    Quote Originally Posted by WTFH View Post
    e.g. your tax code is 100L
    You get £1,000 tax free. Your next £49k is at 20%, and from £50,001 upwards you pay 40%

    e.g. your tax code is 2250L
    You get £22,500 tax free. Your next £27.5k is at 20%, and from £50,001 upwards you pay 40%

    e.g. your tax code is 0L
    You get £0 tax free. Your next £50k is at 20%, and from £50,001 upwards you pay 40%
    I repeat: your tax code != your personal allowance, it only affects how your tax is calculated via PAYE.

    You could have a tax code higher than the personal allowance to reflect some additional allowances (expenses usually) or it could be less as you owe underpaid tax. Your personal allowance remains the same.

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