Checking Your Allowances

HMRC (Her Majesty’s Revenue & Customs) is only human and like all humans they can sometimes make mistakes and it is up to you to spot them if they have got something wrong.

One simple way to start checking is to make sure that you have been given the right tax code. It is not complicated to do but if it is wrong it could end up costing you a lot of money.

Every tax year (6th April until the following 5th April) the government allow you to earn a certain amount of money before you have to start paying income tax and this is usually set out in the pre budget report and confirmed in the Budget. This is called your personal allowance, and “earnings” will include pensions, bank interest and share dividends. The allowance increases when you get to 65 and again at 75. However, if you earn too much, the additional “age-related” allowances are clawed back (known as the “age allowance trap”).

The main allowances for the tax year 2009/2010 are available on the HMRC site.
www.hmrc.gov.uk/rates/it.htm

So what is a tax code and how do I check it?

A tax code is the way the taxman tells either your employer or whoever pays your pension how much tax to deduct. Normally it is made up of some numbers and a letter at the end.

If you multiply the number by 10, this should give you the amount you can receive before tax is deducted. The letters have the following meanings:-

L   Personal allowance aged under 65
P   Aged 65 to 74 and eligible for the full Personal Allowance
Y   Aged 75 or over and eligible for the full Personal Allowance
T   If there are any other items HMRC need to review in your tax code
K   Where your total allowances are less that your total deductions (untaxed income on which tax is still due) i.e. A negative tax allowance

There are other tax codes usually used where somebody has two or more sources of income.

So if, for example, you were age 65 and had received a tax coding of 647K you should contact your local tax office as they might have forgotten your birthday!

How much tax will I pay after my allowances have been used up?

If your income without counting savings is less than £2,440 over your allowances, you can benefit from a savings tax rate of 10% on the balance up to the £2,440.

For everyone else the tax bands for 2009/2010 are as follows:-

Basic Tax Rate 20% on Income £0 - £37,400
Higher Tax Rate 40% on Income £37,400 +

The rates available for DIVIDENDS are 10% at the ordinary rate, and 32.5% at the higher rate.

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