The tax clock is loudly ticking

The end of January tax deadline is looming again and self-assessment taxpayers now only have a couple of weeks to return tax forms to HMRC – or face a £100 fine.

As well as filing a return by the end of this month, any tax due for tax year ended 5^th April 2011 needs to be paid along with the first half of this year’s potential tax bill. Failure to make payment of tax that is due by this date will result in interest being charged on the amount due.

Around nine million taxpayers submit a tax return every year and two thirds of these returns are now filed on-line. Many of us leave the filing of our return to the last minute and this caused around one million people to have to pay a fine last year.

If you are new to on-line returns then you need to register first of all and you can do this at www.hmrc.gov.uk. When you have registered you will receive an activation code through the post and this allows you to go on-line and file your return. Given the state of the postal service at the moment due to the weather time is now at a premium and if you have still to register you need to do it now!

If you still prefer the old fashioned method then HMRC need to have received your return by 31^st January.  You can take your return to a tax office up to that date if you don’t trust the postal service but in a neat little twist HMRC won’t issue you with a receipt to prove you delivered it on time if you hand deliver, leaving yourself open to the possibility of a fine.

New Year, New Rules

So that’s it over for another year and all you have to remind you of Christmas 2011 is a hangover, a few extra pounds round the middle and a few pounds missing from your wallet – oh and perhaps a credit card bill that you expect to drop through the letterbox any day now.

Christmas is the biggest spending frenzy of the year and there is an opportunity now that it is over to reflect on your finances for the coming year. New Year resolutions come and go and most of us promise to make better use of our money in the year that is in front of us – as well as promising to make more time for ourselves and lose a bit of weight and exercise more and stop smoking and not drink as much and spend more time with the kids and learn another language and…..

Make this year the year you resolve to be efficient with your money – and resolve to keep that resolution! Make it the year you stop wasting money – and that’s not the same as stopping spending by the way!

By not wasting money you need to make sure that you are paying as little as possible to borrow money, paying as little as you can for the bills you need to pay every month, and making as much as possible from the money that you have invested. Oh, and doing it all tax efficiently into the bargain.

So to start you off here are five things that you can do this year to make sure that your money is well looked after in this New Year. Let’s start with the one that sounds easiest but is likely to be the most difficult.   

 

1. Plan! 

 

Managing your money effectively doesn’t just ‘happen’. You need to have some sort of a plan. What is it that you want to do with your money and your life, and when do you want to do it?  The new house or car or retirement at 50 won’t just appear and the mortgage won’t pay itself every month.

You need to plan for them.

The starting point is to sit down and work out what you’re trying to do, and when. There are no right or wrong answers to this one, and everyone will have different priorities. You might not even know all of the answers yet, it would be surprising if you did. But you need to ask the questions.

We’ll be looking at this area in a lot more detail as the year goes on but for now start the process. Start to think about what it is you want and when you want it.

 

The plan is not a one-off action, but will evolve over time. You won’t sit down one day for half an hour and say “That’s it then, that’s my financial future sorted, thank goodness I won’t have to think about that again for a while!”

There are things that you can do that will make a difference immediately:

 

2. Ditch the expensive debt! 

 

Make 2012 the year that you get sensible with your credit cards. Credit cards are great when used properly – and remember that as well as offering a sensible way to pay they can also offer protection if something goes wrong with the goods or services you are buying.

 Look for a credit card with 0% interest. Once that interest free period ends try to switch any balance to another card that offers the same. Remember that the money you owe the credit card company is the total balance on your account, not the amount you pay them every month so if you are going to use a credit card pay it off as quickly as you can.

 

3. Work out a sensible budget! 

 

Work out how much you need to spend every month on essentials and stick to that budget. For the next month keep an accurate note of everything you spend. Be honest! This is the starting point for your budget. Make sure you include the monthly cost of things that you pay annually like house or car insurance.

Most us get into trouble because we’re faced with unexpected expenses and don’t have any savings. Try to save a little every month – you can only do this once you’ve started the budget above – and keep it in a separate account so that if something turns up that you need to spend money on in a hurry you won’t have to borrow.

 

 

4. Check out your mortgage rat!e

 

If you have had your mortgage for a while it will be worth looking around to see if there is a better rate available. Lots of lenders will pay your costs for you if you move your mortgage to them. Start off by asking your existing lender if they have any other deals as this may be an easier option than moving to a completely different lender. Remember to check to terms of any new deal. There’s no point saving a bit of money now only to find that you’re tied in and can’t move if your circumstances change.

 

5. Bank on the best account!

 

Lots of current accounts pay very little, and many pay no, interest on your savings. Any cash that you have left at the end of the month should be moved to a savings account with a higher rate of interest. And on the subject of savings rates make sure you look around for the best rate you can find for your money. Inflation is creeping up again and you need to have your money in an account that is paying a rate of interest better than the rate of inflation to make sure you are not losing out.

 

 

Broken camera, or broken contract?

Q. I purchased A Canon IXUS 120IS camera from Camerabox in June 2010 with a 2 year’s full warranty and a lesser 5 year one. My camera is now 18 months old has developed a few faults shuts down error 32, stores pictures up-side down and the picture jumps around when focusing. Within 2 years I am supposed to send camera to them for repair and get instructions from their web site not successful yet as I write this. I cannot reach their site directly but do when I put it on a search. I hear they were in administration in June. Is this still the case? My camera still produces good pictures I just have to keep re switching it on and orientate every picture. Should I return it to them at address I received when I bought it? Can you shed any light on their current status, or give me any advice please.
Geoff Whitby

Your question raises a few interesting points. Firstly, as far as I am aware Camerbox is indeed in administration and there is little chance of you getting money back from them. That doesn’t mean all is lost however and there are two options with regard to the payment you made, depending on how you paid for the camera. If you used your credit card then you may be able to make a claim from the credit card company under Section 75 of the Consumer Credit Act. This allows you to claim against the credit card company (and some debit cards) if the contract is broken as it may have been in this case if the camera is indeed faulty. For a claim under Section 75 to be valid the goods need to cost more than £100 and less than £30,000.

If you used a debit card than you may be able to ask your bank to deal with a refund by way of a ‘chargeback’ on the card. This effectively allows the transaction to be reversed. If you want to claim using this method then you should speak to your card provider in the first instance.

As far as the warranty is concerned my first question would be to ask who was providing it I would also want to ask who is providing the 2-year Warranty – Camerabox or Canon? If the former then you are out of luck but if it is Canon then it may be that you could send the camera back to them and ask for their opinion, especially if the fault is not something that you would expect from a camera less than 2 years old.

I hope this helps

Me and My Money – Dr Hilary Jones

Dr Hilary Jones has been the resident medical expert on Daybreak since before it was Daybreak. Early-morning rises haven’t stopped him taking a sensible approach to his money. In the first of a two-part Me and My Money special he talks about his attitude to cash. next time he’ll talk about his knowledge or his consumer rights, and whether he thinks Doctors are paid too much.

What’s been your most expensive buy?

Other than houses, my most expensive buy would be a special edition BMW 20 years ago. Beautiful car but it must have cost the best part of £7,000 just to drive it out of the showroom and it was subsequently stolen from the street and broken up by thieves to make more BMWs. It’s the last time I ever bought a new car.

Did you learn about money as a youngster?

I learnt that money was very tight and hard to come by. My first job was a paper round paying me a few pence per week but I never threw money around after that.

Do you invest in the stock market?

Yes, but I get someone who knows what they’re doing to do it for me. I don’t take any huge risks. With 5 kids dependent on you, you can’t afford to.

Do you take risks with your money?

No. Every pound I’ve ever earned I’ve had to earn myself, so I would find it stressful to gamble with it.

Would you borrow to set up in business?

Yes, provided the interest rate was reasonable. I do believe you have to speculate to accumulate, but even then somehow I’ve always managed to avoid borrowing.

Are you comfortable banking and buying on-line?

I am now. It took me a while to get used to navigating the system, but since I can’t bear queueing or shopping, this works well for me.

Have you made any real mistakes?

Nothing major. I have some regrets about not following my gut feelings and investing in companies in the past that I’ve thought were likely to do very well, but that’s because I have probably been too cautious.

Are you a spender or a saver?

50/50. I like to have a little put aside for a rainy day or in case the proverbial fecal matter hits the fan, but I enjoy spending a little too.

Do you enjoy dealing with your money?

No. It’s just not something I’ve ever really been into. I have to struggle with keeping abreast of all the new developments in the medical world as it is.

What are your priorities in the next ten years?

To pay off the mortgage, get the kids through University and with a roof over their heads and to enjoy the fruits of many years’ hard work saving lives.

What’s your best and worst buy?

Best buy has got to be every house I have bought so far, and the worst buy either that silly but pretty BMW, or a couple of vintage cars I owned which I eventually lost money on.

Does having money make you happy?

It’s a question of amounts. I see so many unhappy very rich people and so many miserable very poor ones. I think what makes you happiest in life is love, and a good sense of humour. You can’t really buy that.

Cash, cheque or credit card?

Credit card every time. Unlike the Queen. Rarely carry much cash.

Cut spending or increase taxes?

Increase taxes. But only for the very rich. The threshold should be just above what I am earning. Obviously.

Where there’s a Will……

Austin Lafferty is one of Scotland’s best-known and most experienced Solicitors. He is Vice-President of the Law Society of Scotland and has his own practice in Glasgow, www.austinlafferty.com He has commented on all aspects of the law on TV and in several newspaper columns over the years and here he explains, in his own inimitable style, the importance of making a will.

“My favourite film of all time – It’s A Wonderful Life. As well as being a tear-jerker par excellence, and a modern reworking of Dickens’s A Christmas Carol, it provides a barrelful of metaphors for life.

Take the scene where George Bailey (I refuse to do a summation of the plot. If you haven’t seen it then do so immediately) goes to old man Potter to borrow money, and tries to use his small life assurance policy as collateral. It has an equity value of 1,500 dollars, but if he dies , 20,000 dollars. Potter, delighted to see his nemesis so close to devastation, gloats “ hey George, why, you’re worth more dead than alive!”

And so are most of us. If you have a job with a pension, or some life assurance, or a mortgage backed by a whole life policy, or, as I sometimes joke with clients , if you win the lottery and die from the shock, then your ledger balance at time of death is thoroughly in the black. Indeed even if you just have a house and savings and some other financial assets, then once you pass away, those assets must be dealt with, and will realise a substantial payday for someone.

And there’s the rub (Dickens, Frank Capra and now Shakespeare, this is a very literary blog, by the way). Who gets your loot when you go? With no will, you leave it to the law of intestacy – and to chance. I am a Scottish solicitor and am familiar with our scheme of division on intestacy. A spouse will get most – even if separated but not divorced. Kids will almost always get less, and even then, they have to share equally with each other even if one has been marked absent for years and another has looked after you to the end. Worst of all – if there are no relatives, not even alcoholic uncles or undeserving cousins, your estate goes to the state. Yes, the government gets it all if you don’t declare an intention to leave to family, friends or even charities.

Speaking of charities, that leads into another aspect of will-making. As you know , they talk about death and taxes. The two go together in the most unholy of alliances. If you breach the inheritance tax threshold ( £325,000 per person, double for a couple) then 40% of the remainder of the estate is cut away by the Revenue. Unless you take professional advice about IHT planning AND make a will, then you might as well send the government a cheque just now and cut out the middle man.

If people don’t think carefully about wills, they don’t think AT ALL about tax liability. Tax is not something that happens to other people, I come back to where I started, most of us are worth more dead than alive. When I sit down with clients and tot up their possessions , it is astounding ( to them) to find that they are blissfully unaware that they are or may very well be in the IHT zone at the time of their death.

My advice is simple. Make a will. There’s no other way”

Ten Top Tips for Budgeting this Christmas and Beyond

With Christmas only 26 days away here are ten tips to help you the biggest spending month of the year. And keep trhem in mind after Christmas and they’ll help you with your money next year as well.

1. Keep an accurate note of how much you spend for one full month. That includes newspapers and magazines, lunches, cups of coffee and drinks in the pub. Only by doing this will you be able to calculate how much your day to day living is costing you.

2. Try to pay as many bills as you can by direct debit every month. Apart from the fact that you might get a discount for paying this way, if you arrange for bills to be dealt with as soon after your salary is paid as possible then you will know how much money you have left for the rest of the month

3. Keep a spreadsheet showing your monthly income and expenditure. Spread as many bills as you can over the year so that you don’t have big bulges in some months when your expenses increase dramatically. Don’t forget to add in the things that you only pay once a year like your TV License or your Car Insurance.

4. If you need to overdraw to cope with extra expenditure at a particular time remember to ask your Bank first. Unauthorised overdraft rates are much higher than authorised ones and you also run the risk of having bills unpaid or direct debits returned, increasing the charges you are likely to have to pay to your bank.

5. If your borrowing requirements are likely to be longer term then a personal loan might be a better option than an overdraft. Shop around before settling on the loan that offers not only the lowest interest rate but also flexible terms should you find that you are able to repay the debt earlier than you originally intended.

6. Don’t rush into buying something just because you want it today. A store might offer you access to a personal loan or its’ own store card but you should go away and check out the price elsewhere, and whether there are better ways of funding your purchase. This is especially true of more expensive items like furniture or cars.

7. If things get tight at anytime remember that you have to prioritise your debts. If you don’t pay your mortgage you could lose your house, if your electricity remains unpaid you may have it cut off. If you can’t afford to pay everything at one time then you need to make a list of the most important debts.

8. Make sure you speak to your creditors if you are not going to pay bills. There is nothing they like less than debt being built up without being informed. It’s not easy but there should be no stigma to owing money and it is really important that you are up front and honest. Go to them and tell them you have a problem, why you have it, and make a proposal to pay what you can when you can.

9. Remember that if your outgoings exceed your incomings you do have a choice. Most people would look at ways to lower outgoings by trying to spend less. But you could, instead, look at ways of increasing your income, whether by looking for a better rate of interest on savings income or asking for a salary increase or more overtime at work.

10. Here’s the most important tip. A budget is not all about telling you to stop spending money. It’s not supposed to be negative. Just the opposite in fact. It’s all about helping you to spend more money effectively and in areas that you want to spend it, rather than wasting it on high interest charges on loans and credit cards and bank charges. Use it as a positive toll to help you control your money rather than allowing your money to control you!

You’re for the chop!

These are worrying times for a lot of people as employers make cuts to cope with poor trading conditions. But you do have rights as employees, and it’s important to know what these rights are, and what you can do if you think that your employer is contemplating redundancies.

It’s also important to make sure that you understand why your employer has chosen you for redundancy rather than one or more of your colleagues, and to know what you can do to make sure that all processes are followed before you are made redundant

In this second part of a new series on what to do if you think you are at risk of losing your job, Dawn Robertson, Partner at Employment Solicitors Murray Beith Employment (www.murraybeith.co.uk ), looks at what rights you have.

“My employer has confirmed that they are going through a redundancy process with me and some other members of staff. What are they required to do by law?

As with all questions in law, there is never one answer. In this case, the answer does depend on the number of employees potentially affected by the redundancy process. The following answer is therefore based on the number of employees potentially affected being less than 20. If that is not the case, you should seek independent legal advice on your situation.

Under the law, the first thing that an employer is required to do when going through a redundancy process is to establish that it is a redundancy situation. Although the term “redundancy” is applied to all manner of situations, a proper redundancy situation only arises in certain specified circumstances. In general, this usually relates to a reduction in the amount of work available either as a whole or in part of the business. You should check the following website for a full statutory definition of redundancy: http://www.hmrc.gov.uk/manuals/eimannal/eim13800.htm.

Once an employer has decided that redundancy is a possibility, it should consider alternatives to redundancy before properly starting the redundancy process. This means that it should give consideration to whether there is an alternative – such as reduced working hours, reduction in salary, short-time working or job-sharing – to redundancy. If there are no viable alternatives, the employer must then go on to identify the areas within the business which may require a reduction in staff. If, for example, it is identified that there are 5 members of the sales team but that there is now only sufficient work for 4 members of the sales team, then one member of the sales team will be potentially redundant. The employer needs to consider how to select that person. The first step is to establish the “pool” from which that person will be selected. If each role within the sales team is at the same level and dealing with the same type of work, the 5 members of that team will be identified as a “pool” of potentially affected employees. Taking that example forward, the management team would then be required to establish the proposed “selection criteria” for assessing which member of staff would be made redundant. Selection criteria could include a number of different things, for example: length of service; qualifications; relevant experience; interpersonal skills; disciplinary records; and, absence records (excluding anything covered by disability discrimination legislation).

The employer must then meet with the potentially affected members of staff to advise them of the situation and ask them for suggestions of ways to avoid redundancies. This initial meeting will generally be held as a group. Following on from that, management will have to advise staff whether any of their suggestions will be taken forward. If not, the employer must go through an initial selection process, at the end of which the person or people scoring lowest will be informed of a further meeting, to be held on a one-to-one basis. At this point, only the employee(s) provisionally selected for redundancy will meet with their employer. In other words, this is your chance to really put forward your case for staying in your post. You are not entitled to see what anyone else has scored but are entitled to have your scoring re-assessed in light of the information you provide. This is the whole point of only “provisionally” selecting an employee or employees for redundancy as they may then put forward examples of ways in which they should have received a higher score. It is quite often the case that this second meeting is continued to another date while certain points raised by the employee are investigated. If what they say is confirmed, it is possible that the employer will revise their scoring upwards and in doing so it may be the case that someone else within the pool becomes provisionally selected for redundancy (instead of the person initially selected). Should that be the case, they would then require to have a meeting with the management team and would go through the same process, outlined above.

Because of the seriousness of the situation and the possibility that it will lead to dismissal “on the grounds of redundancy”, the employer is required to give you the right to be accompanied at the meeting either by a trade union representative or a fellow employee. They are entitled to make representations on your behalf.

If the process continues and you are informed by your employer that the redundancy has been confirmed, you should be given a right to appeal against the decision. An employer’s failure to give this may lead to the termination of employment being deemed unfair. At the same time, you should be provided with a breakdown of the payments you will be entitled to on termination. This will include any notice period (or payment in lieu) and any accrued but untaken holiday pay, as well as a calculation of your statutory redundancy payment.

You are, in general, entitled to a week’s salary for every completed year of service. The statutory maximum weekly salary is currently £400 and your statutory redundancy payment will be calculated on the following basis:-

• One and a half weeks’ pay for each complete year of service after reaching the age of 41.

• One week’s pay for each complete year of service between the ages 22 and 40 inclusive.

• Half a week’s pay for each complete year of service under the age of 22.

The maximum length of service that may be taken into account for redundancy pay is 20 years.

If you have concerns about your position you should consider taking independent legal advice or contact your local Citizens Advice Bureau. An advisor can help you as you go through the process and provide advice on your individual situation.”

You can’t control your money without a budget.

One of the most common comments that you hear people making about budgeting, and the one thing that puts people off the idea of ever doing one, is that it is about not spending money!

But that is simply not true.

A budget, at its simplest level, is about knowing how you spend money. And knowledge, as they say, is power especially when it comes to dealing with your money

At the risk of teaching your granny to suck eggs this page is pretty basic. But I make no apologies for that because it is often the basics that trip us up! I was talking recently with a bunch of Solicitors (if that is the collective term) and we discovered that one had three gym memberships and another spent a three figure sum every month on coffee from a well known coffee shop! Now the super-fit solicitor with three gyms was well impressed that she could cancel two memberships, stay fit and have more money to spend every month but the other, while surprised the figure was so high, was quite comfortable with his caffeine intake because he reckoned he earned enough to justify the expense!

The interesting thing here was that before I spoke to them they didn’t know about the multiple gym memberships or the expensive coffee habit. If fact they didn’t know an awful lot about how they spent their money every month – and in that they’re no different from the rest of us.

So before we start to look at how to put a budget together there is some work to do. And this is probably one of the single most important exercises you will ever carry out in connection with your money. And I’m not overstating its importance by saying that.

You need to keep an absolutely accurate note of everything you spend for a period of at least a week but preferably a month! The coffee on the way to work in the morning and the newspaper or magazine to read on the train and the sandwich and mars bar at lunchtime and the gin and tonic on the way home and the DVD you rent when you get home. Everything!

And be honest with yourself. You’re not doing this for me or your bank manager or your boss or your partner. And you’re not doing it because you are trying to figure out what bits you are going to have to cut out. You are doing it because the starting point in putting together a sensible budget is to understand how you spend money.

The big stuff is easy – your mortgage and car loan and council tax all come out of your bank every month and you can quickly add them all up and work out how much they total.

It’s the daily money that gets lost. And that’s what you need to get a handle on before we can pull it all together in a sensible format.

And remember this exercise is to help you spend, not stop you spending!

 

 

Don’t let the taxman spoil your Christmas

If you’re a student and about to start work for the Christmas holidays – not that you won’t already have been working hard all year at whatever course you’re doing – then remember that if you organise yourself properly you may not have to pay tax on your valuable earnings over the festive period.

Each of us has a personal allowance of £7,475 this tax year (from April 6th 2011 to April 5th 2012) and this is the amount of money that we are able to earn before starting to pay tax. So if you are only working for a few weeks over the holidays then it may be possible to have your employer pay you without deducting any tax from your pay.

To enable your employer to pay you without deducting tax then you will need to complete HMRC Form P38(S). It can be found at www.hmrc.gov.uk/forms/ps8s.pdf

If you’ve already started work and you have already had some tax deducted then you can still claim it back afterwards by completing a Form P50, and again you can download this form at www.hmrc.gov.uk/pdfs/p50.pdf

If you worked over the summer and paid tax but earned less than £6475 then you can still use this form to reclaim the tax you have already paid, and perhaps use the money to help fund your Christmas spending!

Rachel Hair is struggling with her tax codes!

Rachel is going to ask us some questions about her tax return next week but before she can start to do that she’s confused about all of the different Tax Codes she seems to receive. So here are her questions, and we’ll answer them in a few days. Then next week we’ll get to grips with the accounts themselves! If you want to ad any questions to add to the list then please do so now before we let the Accountants loose on them.

“Every year I get several letters from the Inland Revenue stating ‘your tax code for this year is ……’. The letters then go on to say what job they’re connected to (As well as being self employed I teach a couple of hours each week for East Dunbartonshire Council and for the University of Strathclyde).

I have to say I’m very bad as I just ignore these letters and carry on as normal, though looking back on them I think they all ask me to check that the information they have is correct. It just confuses me as I get several a year…. is it therefore possible to have more than one tax code? If not can I choose which I have? And each time I receive a new letter does it cancel the previous tax code out from the previous letter?

Can you explain exactly what tax codes are??

I’m just very confused and I know I should know what they’re all about!

Also I get a letter from one job that I left years back that I never received a p45 for. The letter tells me every year what my tax code is (every letter I get has a different tax code) for that job even though i no longer work for them…. should I do something about this? I know really I should call up for my p45……..”

We asked Elaine Guthrie of Chartered Accountants Abercrombie Gemmell (www.agca.co.uk) to have a look at Rachel’s queries and come up with some answers and here we go. I think elaine has managed to avoid too mucgh jargon but if she has said anything that you don’t understand then please leave your questions below.

“Employment income suffers tax at source through the Pay As You Earn Scheme. In order to ensure that the correct amount of tax is deducted at source, H M Revenue & Customs issue tax codes each year for each employment someone has. As Rachel has more than one employment, this is why she is receiving several different tax codes.

Rachel’s tax code could be made up of several different items, including her tax allowances, allowable tax deductions, tax reliefs and taxable benefits/income for the year in question. These items are used to calculate Rachel’s tax code, which allows her employers to know how much tax to deduct from her salary in each pay period.

It is worth noting that Rachel’s tax codes are estimates based on her tax position for the prior year. Therefore, once again it is worth Rachel checking her codes to make sure that they reflect her current situation.

As Rachel has more than one employment, it is likely that her tax codes will need to be reviewed to check that the correct codes are being applied to each source of employment. Unfortunately, HMRC’s systems do not automatically tie up all sources of employment income to an individual. This can result in the issue of incorrect tax codes which can lead to under or overpayments of tax.

Rachel notes that she receives several tax codes each year for the same employment. The latest tax code received for each of her employments is the one that will be applied to Rachel’s salary going forward. Any previous tax codes issued for the same employment will no longer be used. As previously mentioned, tax codes are estimated and can change during the year when HMRC become aware of a change in Rachel’s circumstances. This will be why Rachel is receiving several tax codes for the same employment source.

Rachel notes that she is still receiving tax codes for a company that she no longer works for. Rachel should contact HMRC direct and advise them of this which will allow them to close off the employment source from her records and stop all unnecessary correspondence.

It is important to note that every employed individual should be checking their tax codes to ensure that they are correct. This will save any nasty letter popping up in a couple of years’ time telling you that you have underpaid tax for a previous year.”

Based on Rachel’s current position, it is likely that she will be entitled to a full personal allowance of £7,475. As such, the first £7,475 of income received by Rachel is tax free. In order to ensure that Rachel receives her full personal allowance, this will be popped into her tax code.

Therefore, the most basic tax code is 747L, which would ensure that the first £7,475 of Rachel’s salary is received tax-free with the remainder of her salary taxed at her marginal rate of tax. If Rachel had income or benefits in her tax code, these would be offset against her personal allowance thereby reducing her tax free allowance. This would result in more tax being deducted at source. Therefore, the lower the tax code, the more tax is paid at source.

In most cases, a letter follows the numbers in a tax code. This letter identifies the type of individual that the tax code applies to, so for example, the letter L refers to someone who has a basic personal allowance of £7,475. Other letters refer to other types of allowances, including the age related allowance.

The only time that a letter precedes the number is when a K code is issued. A K code is issued when someone’s income or benefits exceeded their personal allowance. This results in an amount being added to the person’s salary before tax is deducted, which increases their overall tax liability.

It is worth noting that there are three other types of tax code : NT, BR an D0. These codes deduct tax at 0%, 20% and 40% respectively from someone’s salary.

Finally, the maximum amount of tax that can be deducted by HMRC via a tax code is 50% of the remuneration paid.”

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