Garbetts News February 2008

Adjustments to your tax code

Employees and employers receive periodic updates to tax code numbers. This number is used by your employer/pension provider to calculate the amount of tax you are stopped on your salary and/or pension.

If your affairs are straight forward (and you are not able to claim certain age related allowances) you are entitled to earn the first £5,225 of your income in 2007-2008, tax free. If this were the case your code number would be 522L.

If your code number drops, to say 200L, you will pay more tax each pay period. If the tax code increases, you will pay less tax. (But see note on K codes below.)

We have listed below a number of generalised factors that may affect your code number. The list is not comprehensive so do contact us if you receive a code number adjustment that is difficult to understand.

Reduction for unpaid tax in earlier years. If you had underpaid tax in the tax year to 5 April 2006 by say £500 the Revenue will allow you, in certain circumstances, to pay the tax back in a following tax year. To facilitate this, the Revenue will deduct an amount from your tax code. For instance if you are a standard rate tax payer, currently 22%, your tax allowances would need to be reduced by £2,272 to effectively recover the £500 you owe. (For those of you who like to see the maths this is calculated by dividing £500 by 22 and multiplying the result by 100 = £2,272). On your notice of coding you would see a reduction in your code number from say 522L to 295L. (522-227).
Reduction for benefits provided by employer. If your employer provides you with a company car, or private medical insurance, or indeed any other form of benefit, without an adjustment to your tax code you would always owe the Revenue the tax on the benefit at the end of each tax year. So that this does not happen your code number will be reduced accordingly. The reduction works by deducting the value of the benefit from your code; thus a benefit of £500 will result in a reduction in your code number of £500, i.e. 50 points.
Reduction for higher rate tax payers. If your earnings are part subject to tax at 40%, and they include significant interest received or dividend income, you will owe the higher rate tax on your investment income at the end of the tax year. To counter this the estimated higher rate tax on your non-salaried/pensionable income will be recovered by reducing your tax code. As your interest and dividends received are taxed at the basic rate, only the marginal increase above the tax already deducted will be taken into account.

What happens if the reduction in your code number is more than your present code?

K Codes - If your tax free allowance of £5,225 is reduced by £2,272, as in example 1 above, you will still have a positive tax code of 295L. If however the deduction from your tax allowance is £10,000 you will have changed a positive tax free deduction of £5,225 into a negative position of -£4,775. This "negative deduction" is actually taxable income. Instead of receiving a tax free allowance of £5,225 you are being taxed on additional income of £4,775.

Your tax code could be changed from 522L to -477L. In their wisdom the Revenue have chosen to display -477L as K477. When you see a tax code prefixed by the letter "K" add on a zero and this is the equivalent income being added to your tax assessment for the year. The larger the K code, the more tax you will pay - although the revenue cannot take more than 50% of your salary in tax in this way!

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		Self Assessment Payments
	Don’t forget your final 2006/07 tax liability was due on 31 January (individual tax payers, including company directors), along with your first 2007/08 payment on account. Interest runs on both amounts from 1 February, and there is a 5% surcharge on any 2006/07 tax unpaid by 28 February. We will have told you how much to pay when your tax return was sent to you for signature – if you are unsure of the amounts to pay, please check the information given there before contacting us as our Tax Department is very busy in these last few weeks of the filing season. You should have recieved either a statement from HMRC showing the amount due – let us know if this differs to what we’ve told you – or a blank payslip / reminder for you enter the amount on. You can also pay online via HMRCs www site. Payments on account for 2007/08 – due equally on 31 January 2008 and 31 July 2008 – are automatically calculated based on your 2006/07 liability, although they are not due if your 2006/07 liability was small or mostly paid at source. If you have payments on account due for 2007/08 but you think you’re 2007/08 income is going to be significantly less than 2006/07 then please contact your account manager at Garbetts to discuss a possible reduction on your payment on account. If you are stuck, please get in touch. Back to top

		Could you cope if you couldn't work?
	If you are suddenly unable to work, your income disappears completely. Yet, while many of us cover our lives to protect our families, very few take the time to protect our income. Income Protection Insurance (IPI) is less well known than life insurance but potentially has many more applications. It will pay your salary if you are unable to work - up to three quarters of your gross income (less any state benefits you may receive) until retirement. It can be expensive, but it comes with a choice of deferment periods and extending this can reduce the costs. Alternatively, you can opt for a Budget Income Protection Plan which will pay out for a 2,3 or 5 years depending on the policy While you are rehabilitating or coming to terms with changes in your life, your financial position with IPI is secure and you are able to pay your bills and keep up your lifestyle. This can be of particular benefit to single people and for the self-employed as a lack of sick pay or financial support from a partner makes you even more vulnerable to a break in your income. If you would like to discuss the benefits of knowing your income is secure speak to one of your Garbett’s Financial Advisers. Give us a call on 01983 527111 if there is anything you wish to discuss. www.garbetts.com/gfs Back to top


	DISCLAIMER - PLEASE NOTE: The ideas shared with you in this email are intended to inform rather than advise. Taxpayers circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this newsletter, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.