Do you pay your tax through the Pay as you Earn (PAYE) system? If you do, did you know that HM Revenue and Customs (HMRC) can also claim the tax you owe on other income through your tax code?
If you have savings or rental income – or other forms of untaxed income – you may be able to add it to your employment or pension income to pay it through your tax code.
What counts as ‘other income’?
Other income that HMRC may be able to tax through your tax code includes:
- Dividend income if you pay higher or additional rate tax
- Untaxed savings interest (if you pay higher of additional rate tax)
- Tips or commission from casual work
- Property rental income
- Some self-employed earnings
How HMRC changes your tax code to deal with other income
Firstly, HMRC tots up the total value of your untaxed income. This is other income as described above plus any other state benefits or taxable company benefits that you receive.
Then, these are deducted from the total value of your allowances and reliefs (such as your Personal Allowance).
What remains is the amount of tax-free income you receive in the current tax year.
Here’s an example. In the 2010/11 tax year, suppose you are eligible for a basic Personal Allowance of £6,475. You also have untaxed savings interest of £400 and rental income of £2,000.
Your total allowances and reliefs are £6,475 and your total deductions are £2,400. This means you can receive £4,075 as income before you pay tax. Your tax code will be 407L.
You will ordinarily receive a PAYE Coding Notice which explains how your tax code has been worked out.
You can only include a certain level of other income in your tax code
If you’re an employee or receive a company or personal pension you can receive up to £2,500 of ‘other income’ in a tax year and still pay tax on it through your tax code. For amounts greater than £2,500 you’ll have to complete a tax return and pay tax through Self Assessment.
You can choose not to pay tax on other income through your tax code and complete a Self Assessment tax return instead.
Contact your Tax Office if your other income changes
If your other income changes you should contact your Tax Office straight away. If you don’t, you could end up paying too much or too little tax.