March, 2013

The New Tax Code for 2013/2014

Over the last few weeks you have probably received your PAYE Coding Notice. This tells you what your tax code will be for the new tax year and how this has been worked out.

For most people, their tax code will change in 2013/2014. But, why does your tax code change? How is it worked out? And what do you have to do about it? Keep reading to find out.

Why do I need a new tax code?

Most people’s tax code changes every year. This is normally because the amount of money you are allowed to earn before you start paying tax – your ‘allowances’ – change on an annual basis.

For example, the basic Personal Allowance in the 2013/14 tax year is rising from £8,205 to £9,440 as part of the government’s commitment to help low income families.

Your new tax code will ensure that you pay the right amount if tax on your income. It also makes sure that your tax payments are spread out over the course of the tax year.

Each time your tax code changes, HMRC send this code to your employer or pension provider. This ensures that the right amount of tax is taken off.

How is this tax code worked out?

1. Work out your allowances

Most people are entitled to the basic Personal Allowance. In the 2013-14 tax year, this is £9,440. It means you can earn £9,440 in the tax year before you start to pay any tax.

If you were born before 6 April 1948 or you are registered blind, you may be entitled to additional allowances.

2. Work out your deductions

Your deductions are any income which you have not paid tax on. This may include company perks, untaxed savings interest or earnings from a second job.

3. Take one from the other

To work out your tax code you take away your deductions from your allowances. So, if you were entitled to the basic Personal Allowance and had no deductions, you would be able to earn £9,440 in the 2013/14 tax year (£9,440 minus £0) before you had to pay any tax.

4. Divide by 10 and add the appropriate letter

Once you have worked out the amount you can earn before you start paying tax, you divide this number by 10. In this case, this would be 944. You then add the appropriate tax code letter for your circumstances.

If you are entitled to the basic Personal Allowance, the letter is ‘L’. So, in this case, your tax code would be 944L.

If you are over a certain age, have more than one job or earn a high amount, your tax code may include a different letter.

What do I have to do when I receive my tax code?

Nothing, unless you think that your tax code is wrong. If this is the case, you should contact HMRC. Make sure you have your National Insurance number and income details to hand.

tax-fix-05

An additional solution to our national debt

bankofengland

The idea of a Withholding Corporation Tax to catch the multinationals which have been avoiding corporation tax has been discussed before.  But there is a further tax that needs to be considered that is both ethical and will help the economy recover more quickly.

We have seen the problems of high interest rates, particularly in the consumer market of credit cards.  Some of these have been charging over 30% interest – on what are essentially demand-driven loans.  Such lending is very profitable for the banks – default is about 1% and the bank doesn’t have to have all the money in the first place.

High interest is a tax on both business and consumer and the cause of bankruptcy or at least depressed economic activity.  If you have £500 a month interest to pay on loans, you can’t spend that money elsewhere.  If a business is being charged massive interest, failure will put people out of work and the net loss to the exchequer, including unpaid income tax and VAT, is enormous.

In other words high interest promotes recession and unemployment every bit as much as public sector cuts.  It is generally a cost on society which we all have to bear yet there seems little we can do about – the market, whatever that means – determines the interest we must pay.  Yet this enormous profitability to the banks from writing loans comes with no liability to pick up the pieces from failure.  Where people pay high interest, the banks walk away laughing and take no responsibility.  It is the taxpayer who coughs up.  Excessive interest charges by banks and other lenders is therefore toxic to an economy.  That must be wrong.

Just as governments try to ensure that the interest they pay in the bond market is minimalised, so every household and every business would like to do this but the market is unresponsive.  And even though interest rates a dropped a little from the Funding for Lending programme, this cannot be a long term solution and doesn’t appear to have affected the upper end of interest charged anyway.

Some countries – and in the United States, some states – have limits on the interest that can be charged.  While this may seem a good idea, it interferes with the market particularly near the cut-off point and corresponding pressure from the lending industry keeps that point higher than is really necessary.  It is therefore not suggested that bank interest rates are capped but that some of the excess interest is paid to reflect the cost to society.

So the idea is to impose an Excess Interest Tax.  Monthly mandatory reporting of the loan book to the central bank together with the interest rates, term lengths and general category as consolidated figures would result in a charge to be paid to the Exchequer.   For example loans written over a certain limit – say 10% (depending on the base and/or Libor rates) – maybe as much as 50% of the excess would be paid as a tax.  Above maybe 20% over BoE base/Libor, closer to 100% of that excess would be paid.  All sorts of sliding scales can be envisaged.

An Excess Interest Tax will help to pay for the consequences of high interest and may persuade the banks to lower their interest charges, which is a win-win situation.    The excess levels would not affect sensible rates – for example mortgages – and by setting different rates for different categories of lending, it will be possibly to direct lending towards small business for example or enable short term loans such as PayDay loans as long as they are not rolled over.

The income from an Excess Interest Tax could be considerable – as much as £30bn a year if the present loan levels are maintained – and as it would be payable to the government it would immediately help to reduce the deficit.  It will of course affect the Corporation Tax payable by banks but this is paid on a much wider range of profitable activities and anyway, it would be money in the Treasury’s pocket today rather than later on.

Taken with tackling the massive tax avoidance detailed in a previous article, as much as £55bn could be raised annually and if tax evasion were successfully tackled as well, a further £70bn could be raised.  The issue in the UK is not one of excess government spending – much of which like education and health care is actually a long term investment – but of government income.  It really isn’t rocket science.