Your UK Tax Code: Myths and Realities

Have you ever wondered why you pay the tax you do? Maybe you think you're on the wrong tax code? I hear so many people throwing incorrect “facts” around about income tax! This post is to discuss the facts, and importantly the myths, of your UK income tax! (Information most useful to PAYE employees, rather than self-employed self-assessment tax)

Standard tax code

Employers have to deduct a specific amount of tax from each pay cheque and send it to the government for use in their schemes. If you are the employee of a company, the most likely tax code you have is 747L (due to change to 810L in April). 747L means that you are entitled to £7475 a year before having to pay any tax (the tax year is 6^th April - 5^th April). This is known as your personal allowance. 

If you are aged 65-74, you are entitled to a larger personal allowance of £9,940 (your tax code will end in a P), although if you receive more than just £24,000 you will have to pay tax on all of your income. If you are 75 or over, your personal allowance is raised to £10,090 (tax code ends in a Y).

Rather than waiting until you've earned £7475 then taxing you heavily, HMRC (Her Majesty's Revenue and Customs) divide the allowance between each pay cheque. If you are paid every week, your weekly allowance would be £7475 / 52 = £143.75. If you are paid monthly, it would be £7475 / 12 = £622.92.

Incomes up to £35,000

If you earn less than £35,000 a year, you will be charged 20% on anything above the allowance. For example if you earned £243.75 one week, that would be £100 over the £143.75 personal allowance, so you would pay £20 (20% of £100) in tax that week.

If you earn £120 one week, but £200 the next week, you would not be charged any tax on the first week but would pay tax the second week.

High earners (£35,001 to £150,000)

If you earn between £35,001 and £150,000, you will pay 40% of whatever you earn over your personal allowance. If you earn more than £100,000 a year, you are not eligible for the personal allowance and will pay tax on all your earnings.

Extremely high earners (£150,000+)

If you earn more than £150,000, you do not have any personal allowance and will pay 50% of whatever you earn as income tax.

MYTH: You pay so much tax on a second job that it's not worth doing!

If you have a second job, your tax code will be BR (Basic Rate) and you will pay 20% tax on all your earnings (unless you're earning more than £35,000 in your second job). This is because your personal allowance is all allocated to your first job and it is assumed that you will reach the £7475 income threshold.

You are paying exactly the same amount of tax as you pay on whatever you earn over your personal allowance at your first job, so your time is worth the same wherever you put in the extra hours!

If you are paid more at your second job, you should get in contact with your local tax office, who will be able to switch the allowance over to the higher paying job. This means you will not be paying as much tax overall.

If you do not receive more than £7475 for either job, you can ask the tax office to split the personal allowance between the two jobs, so that you receive some tax-free income from both employers.

MYTH: Students don't pay tax

The most common misconception I hear about tax is that students (either full-time or part-time) don't pay tax. RUBBISH! Students have the same tax code as anyone else, but because they often only work a couple of days a week, they generally do not earn enough to reach the £7475 personal allowance boundary.

A common problem for some students is actually paying too much tax! This can occur when you work full-time in the holidays, but don't work during term time. You are charged 20% tax on whatever you earn over the personal allowance each pay cheque (£143.75 a week, £622.91 a month), but you don't earn the full £7475 a year. This means that you are owed tax back at the start of the next tax year (6^th April). 

Claiming tax back

If you started a new job after the 6^th April, or you have been on the wrong tax code for part of the year, there is a good chance that you have paid too much tax and are owed a refund by the government. Don't wait for HMRC to come to you, cheque in hand. They are supposed to, but I waited two years before taking matters into my own hands!

You can check how much tax you are owed by using the form (P60) you are given at the end of a tax year. This sheet shows you how much you earned and how much tax you paid. You can use the online tax-checker provided by HMRC to calculate whether you are entitled to a refund.

If you find you are owed money, you should ring HMRC on the number provided on your pay slip, or call 0845 300 0627 (8.00 am to 8.00 pm, Monday to Friday, 8.00 am to 4.00 pm Saturday).

Please note: You can only claim tax back for the past six years. If you discover you are owed tax, claim it back ASAP!

Things You Will Never Need to Buy

There are some things that just sit in your house gathering dust and taking up space. If you've got good neighbours/relatives/friends, stop buying these once-a-month/year/decade items and borrow when needed!

Suitcases – One third of my wardrobe is taken up by a suitcase, which in turn contains holdalls and a hiking rucksack! The person you borrow it off will be glad to get theirs out of the way for a week!

Lawnmowers – Save yourself some shed space and borrow next door's mower when your lawn starts looking like a jungle.

Books and DVDs – You can borrow books and films from the library or friends. I don't know about you, but my bookshelf is stuffed to the brim already! No more room for new purchases!

DIY stuff – No-one needs instant access to a cordless drill or wallpapering table. Borrow as required. (The Boyfriend is already accumulating a lot of random power tools. I would like to put a stop to this before we live together!)

Canning or preserve making stuff – A lot of people have this equipment burrowed away in the back of a cupboard. Ask around and someone will probably be happy to get some use out of their stuff!

Gardening tools – Many a part-time gardener is not going to need their fork and spade all day every weekend. Ask them when they'll be doing their work, then borrow their stuff in the down time.

Top tips for borrowing

• LOOK AFTER IT! You'll remain friends and be more likely to receive a favour again in the future.
• Never borrow anything that you can't afford to replace if you do break it.
• Borrow it for a set period of time. (“I'll get it back to you by Friday”) Even if you haven't finished with it, ring/visit your friend and ask if you can continue using it.
• Don't forget to give it back! The whole point is to reduce clutter, so you don't want someone else's kayak taking up room in your garage!
  
  

One more tip, for future students; if you're going into a Halls of Residence, DON'T TAKE SAUCEPANS OR KITCHEN UTENSILS. Everyone buys a new set for their first time living away from home, which means you end up with six sets of everything!

Anyone got any more suggestions? Do you borrow anything expensive from relatives?

An Explanation

If you read yesterday's post about how much your time should be worth, you may have thought I don't do anything but avoid spending money. I sort of went off-topic, but let me explain why.

The value of money has been on my mind for a while now. In January, the Chinese restaurant I work at shut for a month for Chinese new year, so I decided to ask for more shifts at my other job to reduce the impact of losing half my wage!

Even with the extra hours, I went from ~55 hours a week to ~35, which is a loss of about £100 a week after tax. This is a lot of money for me. Whilst I'm only down in Cornwall for another seven months or so, it would mean another £2800 before I go back to Uni. Yet still I couldn't shake the feeling that life was better working less and living more. Instead of working 5:00 -14:00 then 17:00 - 22:00, I could spend the afternoon and evening doing what I wanted, not using every spare second of the day preparing for the next shift and trying to catch up on missed sleep.

Before Christmas I was constantly exhausted, family and friends never saw me, I rarely even had a day off. I felt like I was missing out on life, something I definitely didn't want during my last year in Cornwall for probably a decade or more (there are no research jobs in my field of interest here).

So as you can imagine, I phoned the Chinese restaurant a few weeks ago and let them know I wouldn't be coming back. It's been a relief, but now that I'm down to one minimum wage job I have less “spare” money. I have to cut back in some areas in order to stay out of debt and keep Jools the golden Peugeot on the road, as well as saving a little to do things I most enjoy.

I have set myself the challenge to bring in a little additional money each month. I say yes to overtime, last month I had a load of Christmas tips on the last day of work at the Chinese, this month I've sold a couple of textbooks on Amazon. (Selling on Amazon is brilliantly easy except that you can't change the postage price, and £2.80 doesn't really cover the cost to send a 5kg textbook by Royal Mail!) I'm also pondering making and selling some things now that I have more free time.

So in answer to my own question yesterday, my time is worth more than £100 a week to me if it means that I have some free time along the way to enjoy life!

What is Your Time Really Worth?

Working in a restaurant, I am continually faced with people brandishing huge amounts of money. First, I wonder why on Earth they carry so much on them in cash! Secondly, I wonder how long it took them to earn it.

When I think about the amount of effort I put in each hour at work, it's so incredibly disproportionate to the £6.08 of minimum wage I receive in return. It's a bit of a sore topic actually! I mean what's the cut off point? Would we be happy working for £3 an hour? What about the outrageous £2.60 an hour for an apprentice?

I normally start work very early. A typical shift for me is 5am - 2pm. When this was first suggested to me, I was shocked! I was a typical student – get up late and go to bed VERY late! Now I'm used to the shift pattern I actually much prefer it. I have most of the day left to get stuff done! Another type of shift pattern at work is 11am-7pm. I've worked this a few times, but I find the pay even less of a compensation than normal, simply because you're wasting an entire day at work, not just a morning!

The customers at work are happy blowing £5 on a meal, so how long did it take them to earn it? It's dangerous to my budget, because I start following the consumerist ideas of “I deserve it” and begin spending more erratically again! I find myself wanting meals out, cinema trips, nights on the town, just because I've “earned it”! I need to remember what I'm earning is financial stability for my future!

My time is worth a lot more to me than £6.08 an hour. Unfortunately this year, that's just the way it's gotta be!

What about you? How much do you think you're worth? ;)

St. Valentine's Day Plans

With less than a week 'til V-day, I've already been asked many times what The Boyfriend and I will be doing to celebrate. This was also mentioned by the man himself, who went “OH CRAP, it's Valentine's Day soon... What shall we do?!” Whilst it's fun to make him sweat a little, I really don't want to do anything on the 14th! 

Frugal Dad recently wrote a post about the money spent on Valentine's day in the US, which was an astonishing $15.7 billion annually! He did also point out that giving gifts to those you love isn't necessarily a bad thing, and can even have health benefits! I just don't like the idea of people frantically running round the shops to buy more Stuff.

There have been a few craft-based Valentine's posts recently too, including Heavenly Handmades' gorgeous muslin heart wreath and Debt Free By Thirty's valentine faux bois. (DEFINITELY didn't have to Google the phrase “faux bois” either... “Faux Bois (from the French for false wood) refers to the artistic imitation of wood or wood grains in various media”...).

Whilst these are very pretty, I don't really want to decorate for Valentine's day. I don't want to go out for dinner either, because it's a) expensive and b) too crowded! Hopefully we'll just dig out a seldom-watched DVD and a bottle of wine left over from Christmas.

What are your plans, if any? Are you staying frugal or pulling out all the stops?

Missing in Action

Hello bloggy world. I've been missing in action of late, but I've caught up on all your lovely posts! I'll have some more posts going up soon, but for now here's a brief update:

I've been travelling round the country! Sounds very fancy and extravagant, but actually I've been visiting Universities that I have applied to do a PhD with. As I mentioned before, it can be pretty pricey to get the train from the deep reaches of Cornwall over the border and up into “the North” (Devon and beyond!) I've spent about £150 so far, but it's been worth it to meet people I would potentially be working with, have interviews, make contacts, have a nose at various people's research. That kind of thing. I've come away with some very positive feedback and I'm quite confident that all will fall into place for me to return to Uni this year. :) SO EXCITING!

I've had the last of my travellings for a couple of weeks at least, so it's back to the grind! Actually, I've been working pretty much all the days I've not been travelling and used holiday pay for the days I was away, so luckily I've not lost any hours/wages!

I haaate interviews! Even when I know my stuff I always think I sound daft! Anyone have any advice? I go bright red too! :D

Budget: Percentages of income

Have you sat and thought about how much of your wages you spend on different things?

I'm sure most people interested in reducing debt and living frugally have a budget. What I was wondering is what percentage of your pay do you allocate to various things?

There are many different alternatives and of course what works well for some people might not work well for others. In my opinion it also depends how much income you bring home to start with; for example, a third of your wages for rent/mortgage payments might sound reasonable, but the average rent in Cornwall (£699 per month) is around 50% of the average take home pay (£1385 net per month).

Last month I spent:

19% on housing (set rate)

12% on bills (set rate)

10% on basic living costs like fuel and some food (fairly set)

15% on wants like entertainment and non-vital purchases (have been spending more than my target lately :-/)

and 44% was savings, both for an emergency fund and for annual expenses like car maintenance.

I am living with my parents for a year after graduating university. It's not glamorous, but it is allowing me to spend that third of my wages on both rent AND bills combined. I'm sure this report would look a lot different this time next year, when I will hopefully be back at Uni!

Have you taken a look at how well you matched your budget with your spending? I have been monitoring my spending for the past month. It has really helped me to see what I'm doing well and what I need to cut back on. Top priority: use some free entertainment ideas this month!!