Say hello to Becky, Becky is a self employed seamstress by night and Admin Assistant by day. She completed her first self assessment last year.
At some point during the year, she received a PAYE coding notice and just chucked it in the bin.
She’s just started to notice her pay from her day job is different….why would that be?
“Did you tick “update my PAYE code”? on your assessment” asks Rachel (Account-ant)
YES says Becky
Well, what that means is that your “self employed tax” is being deducted from your Admin Assistant wage via an adjusted code.
Most (more than 80%) of her income comes from her “day job” so she IS allowed to pay per self assessment tax separately, rather than through her tax code.
When Becky got to the bit in her self assessment which said “if you have not paid enough tax” the following two questions would have been asked: –
“If you are submitting by 30 December, owe tax for 6 April 2019 to 5 April 2020 and have a PAYE tax code, do you want us to try to collect the tax and Class 4 NICs due (if below £3,000) through your tax code for 6 April 2021 to 5 April 2022?
You either answer “yes” or “no” to this but what it is asking is, shall HMRC adjust your tax code and take what you owe out of your wage.
The second question it asks is;
If you are likely to owe tax for the current tax year (ended 5 April 2021) on income other than employed earnings/pensions e.g. savings or the High Income Child Benefit Charge, do you want us to use your 6 April 2020 to 5 April 2021 PAYE tax code to collect that tax during the year?
Again, you can answer “yes” or “no”
What does it mean, huh?!
NEXT YEAR’S tax estimate will be taken out of your “employed” salary THIS YEAR and THIS YEAR’S tax will come out the following year. Confusing right?!
There’s potentially two issues with this –
- If you submitted your self assessment in December 2021 and asked for your PAYE code to be updated, HMRC may try to catch up the tax year therefore you would pay 12 month’s estimated tax in 4 months. Or, you’ll get to the point where you’ve submitted your next self assessment and still have tax to pay.
- You do not know at this point in time what your “self employed” income may be next year so you may end up over paying your tax. You won’t be eligible for a tax refund until after 6th April if this is the case.
If you suspect your Tax code is incorrect, you can get a breakdown from the HMRC website. If it doesn’t make sense or you want another pair of eyes on it, contact your Tax Advisor or Accountant.
What can I do?
You can contact HMRC and ask for your PAYE code to be adjusted back to what it was and you pay your “self employed” tax in January (if your tax is LESS than £1,000) or in two instalments.
At the moment, HMRC are really struggling with workload and calls so this might be tricky.
What would an Account-ant do in Becky’s shoes?
I was a side hustler too, once upon a time! I personally didn’t like my tax code being faffed with so I set aside an estimated tax bill each month to pay in January, I worked out income, less expenses roughly and then times by 20%. If you put it in a savings account, you may even earn a little bit of interest on that money. Either way it’s likely you’ll have at least enough for a posh coffee (which to me is any shop bought coffee 😀) left over!
How can I prevent this palaver in the future?
Please, please, please check your coding notices when they arrive.
If you’ve opted to pay your tax in January, you might not realise you have an issue on your tax code until the end of the year (good or bad!)
If you have an accountant / tax advisor you should send them a copy of the full breakdown or ask them to look at it via their agent’s gateway – we can see them on the gateway but we don’t get notified of new codes being issued so if in doubt please draw our attention to it!
Main information to check:
Name and address
Employer / pension provider’s details
Correct split in codes for expected income from each employer / pension provider
Correct personal allowance (Standard is £12,570 2021/22)
Tax relief for employment expenses / marriage allowance etc.
Deductions for state benefits / tax debts etc. (i.e. if you have an attachment of earnings due to none payment of council tax)
Once you’ve checked the numbers (i.e. 1257L), also check the letter applied to your code (i.e. 1257L). There’s a full list on HMRC https://www.gov.uk/tax-codes which tells you what each letter means (i.e. L is Standard Personal Allowance)
If in doubt, ask your advisor or give me a call and we’ll talk it through.
When you do get to the end of your self assessment and it tells you what your tax liability is, it will also have a “payment on account” which again is an estimate of your next year’s tax liability.
In the below example I would need to be able to pay £1948.20 in January 2022 and then £649.40 in July 2022 which would pay my tax for next year too. Essentially that means you are paying next year’s tax early. It could be earning you interest rather than being sat in an HMRC account.
|Total amount for 2020-21||£1,298.80|
|First payment on account for 2021-22||£649.40|
|Total to be added to Self Assessment account due by 31 January 2022||£1,948.20|
|Second payment on account for 2021-22 will be due by 31 July 2022||£649.40|
If you earn more than 80% of your income from “employment” you CAN request the payment on account be taken off. BUT only if your tax is less than £1,000 so, I would need to pay in two instalments.
PLEASE only do this if you are going to set up a Direct Debit for the payment on 31st January so you won’t forget to pay your tax and risk a fine!
FREEBIE Announcement 😀
For all you lovely self employed people out there who are trying to complete their self assessment alone this year, I have put together a little spreadsheet that should help you keep an eye on where your tax bill is likely to cost at any point in the year. Then you can plan for the outlay rather than worry about it in January!
Drop me a line firstname.lastname@example.org and I will send it over to you.
****Correct at the time of publication, ALWAYS check current rules and regs with your Accountant!****