Can HMRC amend tax codes unilaterally?

The case

Richard Thomas (T) had been a tribunal judge before retiring in 2020 and so had a good understanding of tax. He took exception to HMRC amending his tax code in late 2020, in respect of his civil service pension. It did so to collect further tax it estimated was due on a payment T received from the civil service after he had ceased employment and for which a P45 had been issued. Basic rate tax had been deducted from the payment but HMRC believed T would be liable to the higher rate. T appealed to the First-tier Tribunal (FTT) on the grounds that HMRC could not be sure how the tax it would collect from the revised code would the right amount.

A pyrrhic victory

After an exchange of correspondence HMRC reinstated T’s PAYE code (more or less) and withdrew its argument from the FTT. However, on a point of principle T pushed ahead with his appeal. In its decision the FTT accepted it had the right, but was not obliged, to decide what the correct code was. On the face of it might look like a win for the taxpayer. However, HMRC had already reinstated the code T asked for so he didn’t gain anything. Plus, on the key points the FTT agreed with HMRC that it was entitled to make the original adjustment to T’s code even though it later backtracked.

Despite the rather pointless hearing it’s a useful reminder that anyone has the right to appeal against a code number, if necessary all the way to the FTT. There are rules which HMRC is bound by when calculating a code, which increasingly it tends to ride roughshod over.

Getting the code right

As a general rule, HMRC only has a right to reduce a tax code to collect tax on PAYE income, e.g. state and private pensions, benefits in kind. It can also adjust a code to collect tax underpaid, or that it estimates someone will have underpaid for the current tax year. In spite of the rules, HMRC officers often take a more cavalier approach to calculating codes and attempt to use them to collect tax on all sorts of income. While it’s allowed to do this, subject to restriction, individuals do not have to accept what amounts to collecting tax sooner than it is due. Below is a list of items HMRC often includes in tax codes for which individuals have the right to ask it to remove:

• property rental income
• profits from self-employment
• taxed investment income or dividends
• untaxed investment income, e.g. bank interest.

Where income that falls into the list above, but is no more than, say, £500 per year, it’s probably more convenient to pay the tax through the code.

The final word

Remember that while a tax code determines the amount of PAYE tax that will be deducted from employment income or a private pension, the correct tax liability is determined by self-assessment or HMRC review. Nevertheless, there is no reason to accept a  tax code which results in  paying tax sooner than needed.