We have recently completed the 2015 tax return for 2 individuals, both of whom have just employment income (i.e. not self employed or buy to let investors), and both cases highlight the importance of checking your PAYE tax code, issued by HM Revenue and Customs (HMRC).
Client no. 1
Our client used to work for an employer where she had to use her car for work, so she made a claim for mileage. HMRC included this claim in her PAYE tax code, which simply automatically rolled the claim over each year. So far, so good. However, our client then left that employment the next year and started working for a new employer who provided her with a company car. This obviously meant that she couldn’t claim for mileage for using her own car. Unfortunately her tax code wasn’t changed.
This, of course, meant that her tax code was wrong and she was underpaying her tax. As she is a higher rate taxpayer, it has a much more significant effect, she is underpaying tax to the tune of £2,600 each year. Like most people, she didn’t check her tax code, she (reasonably?) assumed it was correct.
Client no. 2
This scenario swings the other way. Our client had 4 different employers during the 2015 tax year. Only the first employer gave him the correct tax code. The rest, for whatever reason, gave him a tax code which meant he was overpaying tax. The net result for the year is that he’s due a tax refund of £1,100. Luckily, he was asked to complete a tax return, otherwise there’s no guarantee that HMRC would have calculated his overpaid tax correctly (or at all).
Therefore, the lesson is this: check your tax code. Don’t assume that your employer is dealing with it, or just because it’s been issued by HMRC that it’s correct. It may be wrong and you could either be either under or over paying tax.