Tax code error sees worker face £400,000 tax bill – have you checked yours is correct?

Martin Lewis explains ‘complex’ tax codes

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Social media user Throw_back_come_back went to the social media platform for advice on how to rectify their potentially costly situation. They understood that the new job may increase their tax bill due to an higher salary, but having an estimated six figure bill was a shock to the system.

Quickly they began to investigate and realised that their new employer had mistakenly input the wrong salary. 

They shared on the Reddit forum r/UKPersonalFinance: “I’ve just started a new job, and received notification from HMRC that I have a new tax code. I logged on to my account to check, and it seems my employer have submitted my estimated take home this year at something like £900,000.

“This is, you may be surprised to hear, not correct, unless I’ve been promoted to CEO or something and nobody told me.”

Up until this point, they had not actually received a paycheque yet so the situation was not entirely clear. 

They queried the community asking: “How easy is this to fix?

“I assume my actual tax bill end of year will be based on my actual earnings, and nothing to do with this estimate, but does anyone know if I should be concerned about this?”

Tax codes are used by employers or pension providers to work out how much income tax is due on their income or pension. 

HMRC allocates the tax codes and instructs providers on which ones to use, but there is always the potential for error which Britons are urged to check on. 

The majority of the working population will likely have the tax code 1257L.

Typically, employees within the £12,570 and £50,271 bracket with just one employment and no tax deductibles or benefits that may affect their tax liability will receive the 1257L tax code. 

The numbers indicate the personal allowance threshold provided for income tax, which is currently £12,570. 

Earnings below this threshold are not taxed and in June, the National Insurance threshold will increase to this amount as well. 

The current threshold for National Insurance is £9,880 per year. 

The £12,570 threshold for income tax has been frozen until 2026, providing some stability for future planning but also potentially cutting into future paycheques. 

As wages generally rise each year, some people may find themselves edging closer to or even breaching this threshold before it is unfrozen.

This will then result in a higher tax bill. 

Once workers’ wages go above the threshold they are taxed at a 20 percent rate for earnings between £12,571 and £50,270.

If their earnings increase even further they will pay 40 percent income tax for earnings between £50,271 and £150,000. 

Any earnings higher than this amount is taxed at the highest rate of 45 percent.

The 2021/2022 tax year ended at the beginning of this month, making now the ideal time for Britons to check their tax codes. 

HMRC will usually alert Britons if their tax code is changing, like they did for the social media user.

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