Can You Avoid Paying A Lump Sum Of Tax On The 31st January?

If you file your Self-Assessment tax return with HMRC by 30 December, you may be able to have any tax you owe for 2023 collected by a restriction in your tax code for the next tax year commencing on 6 April 2024.  This could negate the need to make a payment of tax on 31 January and instead have the tax collected in monthly instalments through your salary or pension.

There are some circumstances where this is a favourable way to pay your tax, but it doesn’t apply to everyone.

What is a tax code?

A tax code is used by an employer or pension provider to calculate how much income tax to take from your pay.

Different codes – what do they mean?

The most common tax code for individuals with only one source of employment or pension income is 1257L. This is because most individuals are entitled to receive a tax-free personal allowance.  For the current tax year this is £12,570.

Sometimes tax due on other income is collected through your tax code, such as your State Pension, or benefits in kind provided by your employer – for example; car and fuel benefit or private medical, which have not been taxed through the payroll.

Although 1257L is the most common tax code, depending on the individuals’ circumstances there are several other numbers and letters which could be included within a tax code to identify how much tax-free income is receivable in the tax year.  A few of the more common ones are:

BR, D0 and D1 – these are most often used when an individual has more than one source of employment or pension income. BR identifies that a source of income will be taxed at the basic rate of 20%, D0 identifies that a source of income will be taxed at the higher rate of 40% and D1 means the tax deducted at source will be taxed at the additional rate of 45%.

The letter T explains that your tax code requires additional calculations to work out what your personal allowance will be.

Code 0T means that you have no allowances available to set against that source of income, whereas the code NT means that you are not liable to pay any tax on that income.

The final letter which may be included is K. The letter K is added before the numbers on your tax code as it means that some other income is being added on to your pension or salary to be taxed altogether, resulting in you having negative personal allowances (this could be; for example if your State Pension exceeds your personal allowance, or if you are in receipt of any benefits in kind which exceed your personal allowance).

How does a tax code affect an individual in Self-Assessment?

If you are in Self-Assessment, pay tax through your employment or pension income and you have a tax liability for 2023 which is under £3,000, then you may be eligible to have this liability collected through your tax code for 2024/25.  However, this is only possible if:

• You have sufficient income from the source from which the tax is to be collected (as the pension provider or employer cannot deduct more than 50% of your income in tax)
• Your 2023 tax return must be filed on line by 30 December 2023.

Another advantage to having tax owed collected through your tax code is that in some cases it can negate the requirement to make payments on account – which are due in January and July 2024.  Although it doesn’t change the amount of tax due overall, it can be advantageous from a cash flow perspective.

For example; Jane has a salary of £60k and after completing her tax return, the tax due on her new rental  property is £1,200 payable in January 2024.  In addition to this she would have to make the first payment on account of £600 towards the 2023/24 liability meaning that the tax due in one lump sum at the end of January 2024 would be £1,800 with a further £600 becoming due in July 2024.

By opting to have the tax collected through a restriction in her code number, she could avoid the lump sum payment in January and July and spread the payments out in 12 equal instalments over the next tax year.

If you think the above may apply to you or if you have any questions about your tax code please do not hesitate to get in contact with Bev Holroyd, Joseph Edwards or a member of our Private Client Team. They are on hand to support and talk you through the process.