HMRC and tax codes
All contractors will receive a ‘PAYE Coding Notice’ from HMRC at some point which states your current tax code. This code informs employers and pension providers how much tax free income you’re allowed which enables them to calculate how much tax to deduct from your gross income.
For Limited Company contractors this code will be applied to the tax calculation for the salary paid through your company.
The PAYE Coding Notice will show two elements which determine how much tax will be deducted:
- allowances and reliefs – including your personal tax free allowance
- amounts which reduce your tax free amount – including taxable company benefits and any unpaid tax from a previous tax year
What to do when you get one
Store your PAYE Coding Notice safely with your company records. If you have a contractor accountant or tax adviser, ensure that you send them a copy to check if this is correct on your behalf. HMRC do not send a copy of your full coding notice to your accountant.
You would need to check the information, to confirm the details correctly describe your current circumstances and income. Your contactor accountantwill be able to help you with this, unfortunately HMRC are known to make mistakes, so do not simply assume that your code is correct.
An incorrect code can mean that you either pay too much or too little in tax. If you underpay, you risk being sent a large tax bill at a later date to remedy this.
How to get a PAYE code corrected
If you find that information or figures on this are incorrect, contact HMRC. They will make amendments and issue you with correct notice and adjusted tax code.
Tax underpayments and the role of ESC a19
If you receive an unexpected bill for tax underpayment then you may be able to submit a case for writing off your debt under the rules of Extra Statutory Concession a19 (ESC a19).
This allows those who reasonably believed that their tax affairs were in order to be relieved of tax debts incurred due to failures by HMRC. If HMRC are proven not to have made full and timely use of all information given to them, or failed to notify the taxpayer of the underpayment in reasonable time – as defined by ESC a19 – then the debt may be written off.
If this is an option you would like to pursue, speak to your contractor accountant for further guidance.
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.