A useful benefit for those with income taxed at source (pensions or employments) is the possibility of collecting underpaid tax through the tax code (interest free, and by instalments in a later year.)
For example, if you had a liability that would have originally been due for payment on 31st January 2018 – by taking it through the tax code it would be collected by 12 interest-free instalments starting from 6th April 2018 instead.
In order to take advantage of this you also need to submit the tax return in good time, so that it can be processed by HMRC before their December cut-off.
In the past there was a general £3,000 limit for the maximum underpayment that could be collected through a tax code in a later year but this could also be increased depending on the level of income that was taxed at source:
Taxed source income from £30,000 – £39,999 = increased coded maximum £5,000
Taxed source income from £40,000 – £49,999 = increased coded maximum £7,000
Taxed source income from £50,000 – £59,999 = increased coded maximum £9,000
Taxed source income from £60,000 – £69,999 = increased coded maximum £11,000
Taxed source income from £70,000 – £79,999 = increased coded maximum £13,000
Taxed source income from £80,000 – £89,999 = increased coded maximum £15,000
Taxed source income above £90,000 = increased coded maximum £17,000
There are a couple of safeguards in place, to stop people having no money left for themselves in the taxed source income pay:
1) A maximum of 50% of the income can be collected through the tax code. Should a tax code change late in the year then this protects you from having no income at all that month.
2) The maximum that can be collected is double the total tax due for the year originally.
More frequent tax codes
From July 2017, HMRC introduced changes in the way they are processing information.
While in the past an underpayment may have built up during the year due to perhaps increased benefits, their aim is to try to issue a correct tax code during the year so this does not happen.
This will mean the issue of more tax codes, however should avoid the unfortunate double tax collection situation.
Before July 2017, an underpayment may build up for one year and the collection would compound the tax the following year when two years worth of tax is trying to be collected – both the current years liability as well as the previous years liability.
2017 Tax Return deadlines
October is the first tax return deadline and rapidly approaching.
It is a good deadline to aim for as the final deadline – this also ensures that the tax return can be processed in time:
1) So that the statements of account issued in December by HMRC are correct.
2) And that any underpayments can be taken through the tax code if possible.