Cellstudy™ in association with the Tax Academy™
Most of the articles written in this column have been about going self-employed. However, many of you when released from prison will be going employed and working for an employer. In this article I look at the importance of your tax code and the employee ‘starter checklist’.
Your Tax Code
An individual has a personal allowance that enables you to earn an amount of money prior to paying tax. This personal allowance is set by the Chancellor in his budget and the allowance for the tax year 2019/20 is £12,500. In other words, you can earn £12,500 without paying income tax. The personal allowance is spread equally across months if monthly paid and by weeks if weekly paid. Employers provide you with this allowance through your tax code that will appear on your payslip.
This allowance (divided by 10) will precede the letter in your tax code. So, for the financial year 2019/20 the most common code is 1250L – this means that you are under 65 and entitled to the standard tax-free personal allowance. If you live in Wales, the tax code will be prefixed by the letter C (e.g.C1250L) and if you live in Scotland with S (e.g.S1250L).
Emergency Tax Code
The real problem arises when the employer does not have enough information about you and operates a code W1 (weekly pay) or M1 (monthly pay) – meaning that you are being taxed as if it were the first week/month of the financial year.
Example: Were you to be released from prison in November 2019 (the 2019/20 tax year) and commence work, you would be entitled to the cumulative personal allowance between April 2019 and October 2019. However, were the employer to not have enough information about you, you could end up with a W1 or M1 code, and you will lose the benefit of the cumulative personal allowance.
Watch out if the employer operates a BR code, as you will be paying basic rate tax without the benefit of any personal allowances.
Importance of ‘starter checklist’
When leaving prison and starting a new job and you do not have a Form P45 from a previous employer or the Department for Work and Pensions, your employer should ask you to complete a new employee ‘starter checklist’. If your employer does not provide one, you can obtain it by simply typing ‘starter checklist’ in Google.
At a recent meeting with HMRC, they informed me that whilst ‘starter checklists’ are provided to employees by employers they are often not completed. Without the correct information, the employer will then be unable to operate the correct tax code and an emergency tax code will prevail.
The ‘starter checklist’ is important for the following reasons:
• The employer can operate the correct tax code, ensuring you pay the correct tax when released from prison, and you will get the additional benefit of any unused personal allowance in that tax year;
• The ‘starter checklist’ can also help with the calculation of Universal Credit award, if applicable, and ensuring that it is the correct amount;
• HMRC will have up-to-date data about you – keeping your tax records current. This is particularly important if you are due a tax refund.
Please contact The Tax Academy CIC on release if you think your tax code is incorrect.
5 April 2019 marked the end of another tax year – 2018/19.
Get your tax affairs in order pre-release!
Remember to contact The Tax Academy CIC to review your tax affairs to ensure they are up-to-date. There is nothing worse than being released from prison and finding that you have tax penalties and tax debt that need to be resolved with HMRC.