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As promised last month, a few more coding examples to help you practise your skills. As we discussed before, coding notices can become considerably more difficult to understand once you are retired or if you receive multiple sources of income.

Shall we start by considering a married gentleman aged 86, who receives an occupational pension of £12,500, an annuity of £1,000 and his state pension of £5,728? He was born before 6th April 1935 so is entitled to the married couple’s allowance (MCA) as well as his personal allowance. So that must be £10,660 + 7,915? Not quite, MCA is not an allowance in the normal sense and is given at a rate of 10%. It is actually a tax reducer and will reduce his final tax due by £791. To achieve this in the tax code half of the MCA is added to his allowances giving £10,660+£3,958=£14,618. However, beware! a non-taxpayer will be given the full amount in their code raising their allowance to £18,575.  This latter point causes problems for people who are on the borderline of being a taxpayer and their income increases during the year. Moving back to his coding, he will have £14,618 of tax-free allowance from which the state pension needs to be removed before allocating the codes to his pensions. £14,618 less £5,728 =£8,890 divide by 10 to give a code of 889Y (Y because he is 75+). This code should be applied to his occupational pension and his annuity should have basic rate (BR 20%). It is important to check that the codes have been sent to the correct provider, in this case, if the 889Y had been sent to the annuity and the BR to the occupational pension an overpayment would have occurred.

This is all very well but does it work? Once you have been sent your codes, HMRC expect you to check that your income providers are using the same codes and that they take the correct tax. In the example above the occupational pension was given a code of 889Y. To work out the amount of tax these codes will take, remove £8,890 (889×10) from the annual pension, £12,500 – £8,890 = £3,610 and multiply by 0.2 (20%).  It will take £722pa, so divide this amount by 12 to give you the tax you should be paying each month, in this case £60.17. The annuity is taxed at BR, £1,000 x 20%, so it will take £200 p.a. Divide by 12, £16.66 a month. Total tax for the year is £922. Now you need to cross check by calculating what tax was actually due. To do this add up his total taxable income, £12,500+£1,000+£5,728=£19,228 take away his tax free allowances £14,618=£4,610 and multiply by 0.2 (20%) = £922.

If your calculations do not balance out, something may be wrong. If calling HMRC, it is important to make them check that the information they hold on your income matches what you receive from your providers, not forgetting the state pension. The earlier you do this in the tax year the better because it gives the systems time to resolve the problem without building up large underpayments or overpayments of tax.

Next month – K codes

This article is by Tax Help for Older People registered charity no 1102276, offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066.