Tax Codes: Can we help increase your net pay?
In these unprecedented times, cash flow is likely to become a hot topic and cause for concern for many. However, there may be a way to increase your post tax monthly Pay As You Earn (PAYE) income.
If you are in the self-assessment system, have a form of PAYE income (e.g. employment or private pension) and have sources of untaxed income, HM Revenue & Customs (HMRC) may have made adjustments to your tax code.
This allows HMRC to deduct additional tax each month from gross PAYE income to offset against your tax liability calculated on completion of your annual tax return. These adjustments reduce your net monthly income from PAYE sources but in turn reduce the amount of tax payable by the self-assessment payment deadline in January following the end of the tax year.
It is possible to amend or remove these adjustments to increase your net PAYE income.
However, we would like to make you aware that, by removing the adjustments you are only deferring the tax payment to a later date, not reducing your total tax liability. Any reduction in tax taken at source will increase the amount payable through your self-assessment tax return.
The difference in payment dates is best shown in this example:
For the upcoming 2020/21 tax year, Mrs A has a private pension paying her £50,000 per year. In 2019/20 she made a gross profit of £10,000 from renting out her buy-to-let property. HMRC have automatically adjusted her tax code to include an estimate for rental profits in 2020/21 of £10,000 and will collect additional tax from her gross pension income each month.
From April 2020, if no adjustments are made to Mrs A’s tax code she will receive net pension income of £3,209 per month and, provided that her actual rental profits for the year were £10,000, she would have no additional tax to pay in January 2022, following the completion of her tax return.
However, if we amended her tax code to remove the rental income adjustment Mrs A’s net monthly pension income will increase to £3,542: freeing up £333 of cash each month. Then, when it comes time to complete Mrs A’s 2020/21 tax return, she will pay the additional tax liability, due on her rental profits, in January 2022. Again, assuming the actual profits were £10,000 for the year, her additional tax payable would be £4,000 (plus payments on account where applicable).
As you can see, by amending the tax code we have increase Mrs A’s monthly net pay from April 2020 by deferring the additional tax payable to January 2022.
If you would like us to review your tax code for the year 2020/21 or are unsure if changing your code will benefit you please get in touch with our tax team.