Tax code reductions
3 mins
You may have heard of the term Tax Code Reduction but have absolutely no idea what it means! Don’t worry, we at DSR Tax Refunds know just how utterly baffling taxation regulations can be and that is why we want to bring our expertise to you, to guide you through the maze of different terms and regulations. After all, if you don’t know what all these regulations are and how they apply to you, how do you know if you are paying too much tax? If you get to the bottom of the guide and you’re still unsure of whether this applies to you, our friendly and helpful team are ready to help – just give them a call on 0330 122 9972.
What are tax code reductions?
Sometimes HMRC will change your tax code to reduce your personal allowance. This means that you will pay more tax while this tax code reduction is in place. if you think that you are paying more tax than you should due to a tax code reduction, give us a call on 0330 122 9972 and let us sort it out for you.
Causes of tax code reductions
The idea behind tax code reductions is to reduce your personal allowance so that you pay more tax. Now that might be because you have an additional source of income, because you are in tax arrears or because you receive what are called “taxable benefits”.
Common causes of tax code reductions are:
- Because you receive a state pension. A state pension is taxable but the Department of Work and Pensions (DWP) aren’t able to collect that tax through the PAYE system for every pensioner. As a result, the tax payable is collected by reducing your tax free allowance by the amount of state pension you receive each year.
- Because you receive taxable benefits in kind from your employer, sometimes called ‘perks’ or ‘fringe benefits’. These don’t come as part of your salary but are provided separately by your employer. Some of these benefits are tax-free (such as pension contributions or counselling services for employees being made redundant) but others are taxable which means that the value of the benefit is taken away from your personal allowance. Examples of taxable benefits include private medical insurance, company cars and subsidised loans. HMRC bases the taxable value as the cash equivalent value – that is, how much it costs your employer to provide this benefit to you. Your tax code may then be reduced to account for their value.
- Because you have an outstanding tax bill from a previous tax year. If you are in arrears with HMRC from a previous tax year, HMRC may reduce your personal allowance to allow you to pay back those arrears monthly rather than having to pay them in one lump sum.
- Because you receive income that is difficult to tax before you receive it. This is usually because the income cannot be estimated before it is taxed – for example, interest on savings that is not taxed at source. Your personal allowance will be reduced by an estimate of the income that HMRC expects you to receive from that particular income source.
Hopefully this explanation of tax code reductions has been helpful but if you have any questions about your tax code and any reductions applied to it then give our team of experts a call on 0330 122 9972 – we might even be able to get you a refund of the extra tax you have paid. We aim to get your maximum refund fast!