What should I do if my tax code is incorrect for my Self Assessment?

What should I do if my tax code is incorrect for my Self Assessment?

Your tax code is important because it affects how much income tax you need to pay to HMRC. If your tax code is wrong, you might pay too much or too little tax, which can have financial impacts resulting in a tax refund or a requirement to pay outstanding tax..

If you pay all your taxes through your Self Assessment, you won’t have a tax code. However, if you have other income – maybe you pay yourself through a company or have another part-time job which is paid via PAYE, then you will have one and it is essential it is correct.

This blog post will help you know what to do if you think your tax code is wrong on your Self Assessment tax return.

Understanding your tax code

Your tax code is a unique combination of letters and numbers that decides how much Income Tax is taken from your pay.

It’s crucial to understand how your tax code works:

  • Your Personal Allowance: This is the amount of income you can earn each year without paying Income Tax.
  • Tax bands: Income Tax is charged at different rates depending on your income level.
  • Tax code calculation: Your tax code reflects your Personal Allowance and the tax bands you fall into.

Before we delve into the corrective actions, let’s briefly understand what a tax code actually represents.

  • Standard tax code: This is the most common tax code, usually starting with 1257L. The ‘L’ signifies that you are eligible to receive the standard tax-free personal allowance.
  • Non-standard tax codes: These codes deviate from the standard and often reflect specific circumstances, such as:
    • Emergency tax codes: Used when your employer doesn’t have enough information about your income and deductions.
    • BR codes: If you have a BR code, all your income from this job or pension is taxed at the basic rate. This code is usually given if you have more than one job or pension.
    • K codes: If your tax code starts with ‘K’, it means you have income that is not taxed in another way, and this income is more than your tax-free allowance.

Common reasons for incorrect tax codes

  • Changes in circumstances: Events in your life, like getting married, getting divorced, starting a new job, or becoming self-employed, can change your tax code.
  • Pension contributions: Changes to your pension contributions may require a tax code adjustment.
  • Benefits-in-kind: Receiving benefits-in-kind from your employer, such as a company car or private healthcare, can impact your tax code.
  • Self-employment income: If you’re self-employed, your tax code will need to reflect your estimated profits.
  • Tax relief claims: Claiming tax relief for things like charitable donations or childcare costs can affect your tax code.

Signs of an incorrect tax code

Several indicators might suggest that your tax code is incorrect:

  • Unexpected tax refunds or bills: If you receive an unexpectedly large tax refund or a significant tax bill, it could be a sign of an incorrect tax code.
  • Changes in your circumstances: Life events such as marriage, divorce, starting a new job, or becoming self-employed can impact your tax code. It may be incorrect if these changes haven’t been reflected in your tax code.
  • Discrepancies on your payslip: Carefully review your payslip for any inconsistencies in the tax deductions.
  • Changes in your take-home pay: If your take-home pay has suddenly decreased or increased significantly without any changes to your income or deductions, it might be a symptom of a wrong tax code.

What should I do if my tax code is incorrect?

If you suspect your tax code is incorrect, follow these steps:

1. Gather information:

  • Collect your payslips: Review your payslips from the relevant period to identify any discrepancies.
  • Note your National Insurance number: This is essential for all communication with HMRC.
  • Check your P60: This annual statement from your employer provides a summary of your income and tax deductions.

2. Contact HMRC:

  • Use HMRC’s online services: If you have an online account with HMRC, you can usually check and update your tax code online.
  • Call the HMRC helpline: If you prefer to speak with an agent, contact them by phone.
  • Write to HMRC: If your issue is complex or requires detailed documentation, you can send a letter to HMRC.

3. Explain the situation clearly:

  • Be specific: Explain the issue with your tax code and provide supporting evidence, such as payslips and P60s.
  • Be polite and professional: Maintain a courteous and respectful tone throughout your communication with HMRC.

4. Keep detailed records:

  • Document all communication: Keep copies of all correspondence with HMRC, including emails, letters, and call logs.
  • Note down the date and time of your calls: This will be helpful if you need to refer back to the conversation later.

5. Update Your Self Assessment Return:

If the incorrect tax code has affected your income tax liability, you’ll need to amend your Self Assessment return accordingly.

  • Use the HMRC online services: You can usually amend your return online through your personal tax account.
  • Seek professional advice: If you’re unsure how to amend your return or if the situation is complex, it’s best to consult with a qualified tax advisor.

What happens if my tax code is incorrect?

  • Tax arrears: If you’ve underpaid tax due to an incorrect tax code, you may be liable for tax arrears.
  • Penalties: HMRC may impose penalties for late or incorrect tax payments.
  • Interest charges: Interest may accrue on any unpaid tax.
  • Overpayment refund: If you’ve overpaid tax, you’ll be entitled to a refund. However, it may take some time for HMRC to process your claim.

What possible solutions can I take?

  • HMRC will correct your tax code: If HMRC agrees that your tax code is incorrect, they will update their records and adjust your tax deductions accordingly.
  • HMRC may request further information: You may be asked to provide additional information to support your claim.
  • HMRC may investigate the issue: HMRC may need to investigate the issue further before making a decision.

How can I prevent future issues?

  • Review your payslips regularly: Check your payslips carefully each month to ensure the tax code is correct.
  • Inform HMRC about any updates to your circumstances: Inform HMRC immediately of any life events that may affect your tax code, such as marriage, divorce, starting a new job, or becoming self-employed.
  • Maintain precise records: Ensure you keep exact records of your earnings and expenditures all year long.
  • Seek professional advice: If you are not sure about your tax code or have any concerns, consult with a qualified tax advisor.

Conclusion

An incorrect tax code can have significant financial implications. By understanding your tax code, monitoring your payslips, and promptly notifying HMRC of any changes in your circumstances, you can minimise the risk of errors and ensure you pay the correct amount of Income Tax. If you suspect your tax code is incorrect, take action promptly to rectify the situation and avoid potential penalties. If you are unsure about any mistake regarding your Self Assessment tax return, schedule a free consultation with us.
Tushar Shah

Author

Tushar Shah
Tushar Shah, the ACCA-qualified founder of 3E’S, is an expert in financial accounting and tax advisory. Passionate about supporting small business growth, he likes to write about leveraging accounting and financial advice to solve the unique challenges entrepreneurs face, drawing on his own unique experiences.

Related blogs

How to register for Self Assessment as an expat

Living abroad as an expat offers a wealth of experiences, but navigating the tax system of your home country can add … Read more

4 Reasons Not to DIY Your Tax Return For Your Small Business

As a small business owner, you may be used to taking the DIY approach. After all, you’re most likely a marketer, … Read more

X

Subscribe to our blogs

Enjoy our carefully-picked accountancy blogs, company news and industry updates every month.

    We won’t spam - promise!

    By completing this form, 3E’S Accountants will use your contact details to send you information from our latest blogs we feel will be of interest to you.