A recent report has found that UK workers could be overpaying more than £8 billion in tax, simply because they have the wrong code.
Canada Life’s survey suggests that nearly half (43%) of Brits who check their code find that is wrong. Of those, around 71% go on to find that they are overpaying.
Checking your tax code could lead to a tax rebate, but how do you check your code, and how do you request a repayment?
Here’s everything you need to know.
Reports suggest that only around two-thirds of Brits are on the correct code
Having the correct tax code is crucial for ensuring that you pay the right amount of tax and that you receive the amount of income – whether from work or your pension – that you are entitled to.
While just over two-thirds (67%) of Brits think they are on the right code, only 38% are sure. Even those who have checked only did so, on average, two years ago.
Your Personal Allowance has been frozen since Rishi Sunak’s spring Budget back in 2021 – and will remain at its current level until 2028 – but other factors could affect the tax you pay.
In fact, 38% of those surveyed confirmed that they had noticed a change in the amount they pay in Income Tax in the past three months.
Pay rises or bonuses could tip you into a different tax threshold, while certain flexible pension options could see you receive a large payment in one go. This also affects the amount you pay or move you onto a new (possibly incorrect) code.
Be sure to check your code immediately if you are worried it might be wrong
While switching to the right tax code could highlight that you’re due a rebate, it’s important to remember that the opposite might also be true.
If you have been paying insufficient tax, the sooner you find out the better. Otherwise, you could find yourself liable for a huge lump sum.
You can use online salary and tax calculators to see if you are paying the right amount of tax, but check your payslip too, or speak to us.
Estimate your Income Tax for the current year using this HMRC calculator.
Worryingly, around 8 million UK taxpayers don’t know how to claim overpaid tax. The first step should be to contact HMRC.
Explaining your circumstances, and the reason you think your code is wrong, should help them to calculate the rebate due.
Also, remember that you’re unlikely to be able to reclaim overpaid tax if it is more than four years since the payment was made – another reason to check as soon as possible.
Understanding taxation and your pension
The pension you receive is likely to be taxed as income, so you must understand the tax you pay to budget effectively.
Most pension options will allow you to take 25% tax-free cash, although some defined benefit (DB) schemes might have higher eligibility.
How the remainder of your income is taxed will depend on the option you choose.
An annuity
The regular annuity income you receive (after tax-free cash) is taxed at the highest rate of Income Tax you pay.
Uncrystallised fund pension lump sum (UFPLS)
If you opt for a lump sum – or a series of lump sums – using Pension Freedoms options, each payment will be made 25% tax-free, with the remainder taxed as income.
Large lump sum payments could push you into a higher tax bracket so be sure to think carefully about when and how you access your fund.
Also, be aware that an UFPLS payment could trigger a “month 1 tax” indicator. Effectively, this assumes that the payment you receive is the first of 12 regular monthly payments of the same amount and you could be overtaxed accordingly.
Check your code and be sure to reclaim any overpaid tax.
Flexi-access drawdown
The tax you pay on flexible withdrawals will depend on whether you take your full tax-free cash entitlement at the outset or opt to receive a portion of tax-free cash each time.
Non-tax-free cash payments will be taxed at your marginal rate.
Get in touch
Checking your code regularly gives you peace of mind that you are paying the right level of tax for the income you receive. Look at your code now and you might find that you are due a rebate. It could also help you to avoid any nasty surprises in the future.
If you have any questions about the tax you pay, or you’d like to discuss any aspect of your long-term retirement plans, get in touch now. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
