Some years back now the tax system started to change, especially where higher earners are concerned. The result is you cannot always rely on all your tax being collected by PAYE. Sometimes this leads to an unwelcome tax catch up bill at the end of January. Sometimes, depending on the level of underpayment, you can get the arrears collected by having your next year’s tax code amended.
One of the main factors leading to underpayment of tax is the personal allowance. This is the amount an individual can earn in a tax year without having to pay tax. In the year to 5 April 2020 this is £12,500 but if you earn over £100,000 you start to lose this amount. For every £2 you earn over £100,000 you lose £1 of your personal allowance. Once you hit £125,000 in the year to 5 April 2020, you get no personal allowance at all.
Another cause of underpayment are benefits provided by your employer. It might be private medical insurance, a low interest loan or a car for example. The value of these benefits fluctuate and your code number may get out of date.
Then there is other income not related to your employment. Remember that all your income is added together for determining your taxable income.
So if you don’t want any unpleasant surprises, work out what you think your tax should be in a tax year and then see if the amount you are paying in PAYE is keeping pace with that amount.
If things look wrong, you might need an accountant – but we would say that, wouldn’t we.
