Standard UK allowance and tax code
Every individual employed by a UK company on a PAYE scheme will be entitled to the UK tax allowance, currently £12,570 and granted a tax code of 1257L. The government currently anticipates keeping the tax allowance unchanged until April 2028. The tax allowance is spread over the tax year, meaning £1,047.50 of your salary is tax free per month.
Earnings above £100,000
If your annual salary is above £100,000 you will start to lose your personal allowance, every £2 earned above 100K, you lose £1 of your allowance. So, if your annual salary is above £125,500 you will have NO allowance in that tax year.
If an individual who earns above £100,000 does not pay attention to their tax code, they could potentially be underpaying taxes via PAYE and when they come to complete their annual tax return (every individual who earns above 100K must process a tax return) be surprised by an unexpected tax bill to HMRC.
So, if you are earning above £125,000, the correct tax code in general would be 0T, which means zero tax allowance.
What’s the solution?
Generally, HMRC will pick up on this point and change your tax code, either reducing your tax allowance via a new code or removing your tax allowance with a NT tax code. HMRC will update your company regarding your tax code, and you will see this change on your payslip in the tax code section.
However, there are scenarios that HMRC will not change your tax code, or your employer does not make the change HMRC have authorized, so it’s crucial that the individual takes responsibility and contacts HMRC to update their tax code and inform their employer of the updated tax code.
Methods of contacting HMRC
HMRC are offering quicker ways of getting in contact regarding personal tax issues to help the taxpayer not have to wait so long on the phone. You can now contact HMRC via their live chat (https://www.tax.service.gov.uk/ask-hmrc/chat/self-assessment) or download the HMRC app on your phone and request HMRC to review your tax code based on your current salary.
If you prefer the old method of calling HMRC, here is their contact number 0300 200 3310.
Salary sacrifice Option
Another possibility is trying to keep your annual “taxable salary” below £100,000, even though your annual gross salary is higher than £100,000. The way you can do this is by creating a salary sacrifice pension scheme, whereby employee contributions per month will reduce your taxable pay.
Example – Johns annual salary is £115,000, so his annual tax allowance will be reduced by £7,500. John decides to set up a salary sacrifice scheme and contribute £15,000 over the tax year, so John’s taxable pay is reduced to £100,000, therefore John will receive his full tax allowance.
End of year contribution
If an individual did not setup up a salary sacrifice scheme and earnt above £100,000, there is still a possibility of keeping your entire annual tax allowance by processing an end of year contribution to your pension scheme, lowering your total salary to £100,000.
Please note that it’s advisable to contact a pension advisor before making any end-of-year contributions as you do need to consider the annual allowance for pension savings.
(https://www.fkgb.co.uk/annual-allowance-for-pension-savings/).
