 Big bills loom if your 2010/11 tax code number is wrong warns PKF
25 January 2010: With HM Revenue & Customs (HMRC) now sending out millions of tax code notices to individuals for the 2010//11 tax year, PKF Accountants and business advisers is warning individuals to check that their tax code is correct to make sure they are not out of pocket now, or facing an unexpected tax bill in future.
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 | Matt Coward, Director of Private Client Tax Services at PKF says: “The sheer number of tax code notices that HMRC sends out each year means that very few receive the attention needed to ensure the correct amount of tax is collected from a person over the year. Recent changes mean that the error rate will be higher this time round.
The code reflects your tax free personal allowance, but HMRC are entitled to include things like benefits in kind from an employment. They may also try to collect tax due on an individuals’ estimated investment income (bank interest, dividends, rental income) through their tax code; in many cases, that estimate of investment income will be based on last year’s tax return, and may well be excessive and out of date. For example, a person with an occupational or private pension may find their code contains large amounts of estimated investment income, eating into their tax free allowances throughout the year. Although the error will be corrected once the tax return is submitted, cash flow difficulties can be caused in the meantime. Taxpayers can of course object to the inclusion of such investment income in their tax code if they do not wish to pay tax on these sums before it falls due." |
At the other end of the income scale, higher paid employees may well be paying too little tax throughout the year and storing up a large liability falling due in early 2012. This is due to a number of changes to personal tax for top earners in 2010/11.
Firstly, from 2010/11, individuals with total net incomes over £100,000 per annum, will have their personal tax allowance reduced by £1 for every £2 of net income* over £100,000. With the basic personal allowance frozen at £6,475 for 2010/11, the effect is that it is reduced to nil where an individual has net income* over £112,950 per year. This creates a marginal tax rate of 60% for individuals with net income between £100,000 and £112,950.
Matt Coward says: “If individuals do not spot that they are not entitled to the personal allowance in 2010/11, but their tax code continues to show it for the year, they could build up a tax bill of up to £2,590 that will have to be paid by 31 January 2012. Equally, those who have to take a pay cut, miss out on their usual bonus, or have to take a lower paid job during 2010/11, may not get the tax allowances that they are entitled to until their returns are submitted.”
Secondly, many top earners have been making large pension contributions in recent years, and these will be reflected in 2010/2011 tax codes. However, with the reduction in tax relief for substantial one-off pension contributions from 22 April 2009, many higher earners have slashed their pension contributions, yet their tax code still gives them tax-free pay based on their historic pattern of pension payments. Any underpayment will of course have to be paid by 31 January 2012; in some cases the historic pension payments have been large, and so will be the tax bill.
Matt concludes, “Errors can occur in coding notices and so everyone should take a little time to check that their tax code is correct. If it’s wrong, HMRC will be happy to make the necessary adjustment, but they won’t do so unless you ask.”
Matt advises the following-
• Check that HMRC has accurately reflected any benefits in kind in the coding notice.
• Taxpayers have the right to object if an excessive estimate of investment income is included in the code, or against the inclusion of any such income at all.
• See if HMRC has included deductibles in your coding notice (charitable contributions, allowable subscriptions, etc) and ensure these are at the correct level.
• For those over 65, make sure that HMRC has allocated you the correct age related allowance taking into account the level of your income.
• You may wish to tell HMRC if you plan to make or stop making large personal pension contributions, if your entitlement to a bonus may change, or you expect to change jobs or retire during the year.
Ends
For further information, please contact:
Jane Murray, 020 7065 0135, jane.murray@uk.pkf.com
Notes to Editors:
* Net income for these purposes takes account of losses, pension payments (in full) and allowable contributions to charity.
- PKF is a leading firm of accountants and business advisers with more than 1,500 partners and staff operating in 23 offices in the UK mainland firm, a wholly-owned financial planning company and associated offshore practices. The firm specialises in advising growing and entrepreneurial/owner-managed businesses, AIM and fully listed companies, and also has extensive experience in the public and not-for-profit sectors. Principal services include assurance and advisory; taxation; consultancy; corporate recovery and insolvency; corporate finance and forensic. The firm has particular expertise in advising sectors such as hotels and leisure; mining and resource; public sector; real estate and construction; professional practices; not-for-profit; and medical. The firm’s web site is www.pkf.co.uk.
- PKF (UK) LLP also offers financial services through its FSA authorised company, PKF Financial Planning Limited. PKF (Isle of Man) LLC is a limited liability company registered in the Isle of Man. PKF (Guernsey) Limited is incorporated in Guernsey.
- PKF (UK) LLP is a member firm of the PKF International Limited network of legally independent firms. The PKF International Limited network has more than 14,650 people operating in 119 countries around the world.
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