Paying income tax through your tax code
If you are a director of a Limited Company then you will need to file a tax return each year and, if there is tax owing, you will need to make payment to HMRC. If your liability is less than £3,000 you can apply to have this collected through your tax code rather than paying it outright, provided you file your return before the 30th December. This will mean lower net wages for you during the next year, and higher payments to HMRC each quarter.
This payment option should be used with caution though, as HMRC have the right to refuse and they may not actually tell you that they’ve done so until after the payment deadline has passed, leaving you with interest and potentially penalties.
A recent First Tier Tribunal Case, Ross v HMRC (2014), underlines the fact that HMRC are permitted to refuse a coding request if it would result in a K code being issued to the taxpayer that would deduct more than 50% of their income in tax. Other reasons they may refuse a request are:
- If you don’t have enough PAYE income to enable HMRC to collect it.
- If you would end up paying more than twice as much tax as you normally do each time you receive your pay or pension.
You should look at your level of salary and estimate the tax that will be due, and that will guide you as to the maximum amount that can be collected through your code. On a salary of £12,000 that’s just £400 – anything in excess of that would be over twice the tax you normally pay, and therefore could be refused.
The moral of the story is that even if your liability is below £3,000 you should not assume it’s safe to tick the “collect through tax code” box and then forget about it. The first you’ll know of an HMRC refusal will be a penalty notice when your payment is late, so it is essential that you keep an eye on your Government Gateway account to ensure it has gone through.
Your contractor accountant can of course help you to check, so ask if you’re not sure.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.