Understanding your tax code : Expenses Payments and Other Income

Expense payments in your tax code

If you’re reimbursed for expenses you incurred as part of your job you’ll have to pay tax on the payments. HM Revenue & Customs (HMRC) usually include the expense payment in your tax code and collect any tax due through PAYE (Pay As You Earn). You may get tax relief on these expenses – these will also show in your tax code.

Expense payments and tax relief

If your employer has reimbursed you for expenses you incurred in carrying out your job – such as the cost of professional subscriptions or the use of your home telephone – you will have to pay tax on the payments you have received.

However, you may also be able to get tax relief for your expenses – this has the effect of cancelling out the tax you are due to pay.

Both the expense payments and any tax relief you’re due will show on your PAYE Coding Notice – as described below.

Expenses entries on your PAYE Coding Notice

Expense payments

The expense payments appear in the section on your PAYE Coding Notice called ‘Items that reduce your tax-free amount’ – under the headings ‘Taxable expenses payments’ and ‘Telephone’.

Tax relief on expenses

Any tax relief you get on expense payments will show in the area called ‘Allowances and reliefs’. Typical entries might include:

• ‘flat rate job expenses’
• ‘job expenses’
• ‘professional subscriptions’

Expense payments and tax relief – example

You’ve paid professional subscriptions of £210 to an approved organisation. You have to belong to this organisation for your job so your employer reimburses you the money:

your total allowances and reliefs are £6,685

 – made up of your Personal Allowance of £6,475 (the amount for the 2009-10 tax year) plus tax relief of £210 for your ‘professional subscriptions’

your total ‘deductions’ (amounts which reduce your tax-free pay because they count as taxable income) are £210

 – made up of your ‘Taxable expenses payment’ which is the amount your employer has reimbursed you for your professional subscriptions.

your total tax-free amount is £6,475 – the same as it would have been if you hadn’t had the expense payments in the first place.

So, you have tax-free income of £6,475 and your tax code is 647L.

Other income taxed through your tax code

If you have untaxed income such as rental or savings income – and you already pay some tax through the PAYE (Pay As You Earn) system you may be able to add it to your employment or pension income and pay tax on it through your tax code. If HM Revenue & Customs (HMRC) know you’re getting a State Pension or taxable state benefits they will automatically arrange for you to pay tax on them this way.

What counts as ‘other income’?

Other income that can be taxed through your tax code includes:

• some income from property such as rental income
• untaxed bank or building society interest (the first 20 per cent is usually deducted before you receive payment but you’ll owe a further 20 per cent if you pay higher rate tax)
• dividend income if you pay higher rate tax (10 per cent is deducted before payment but you’ll owe a further 22.5 per cent if you pay higher rate tax)
• income from casual earnings, eg tips or commission
• some self-employment earnings

If you have other income that is not shown above please contact your Tax Office for advice.

How HMRC deal with other income in your tax code

HMRC add up all your untaxed income – your other income as described above plus the value of any taxable company benefits or state benefits that you get – and take it away as ‘deductions’ from the total value of your allowances and reliefs. The amount you’re left with is the tax-free income you receive in the current year.

Example

You are entitled to the basic Personal Allowance of £6,475 (the amount for the 2009-10 tax year) and you have untaxed building society interest of £500 and rental income of £1,500:

• your total allowances and reliefs are £6,475 – your Personal Allowance
• your total ‘deductions’ are £2,000 made up of £500 plus £1,500
• your total tax-free amount is £4,475 which is £6,475 less £2,000

So, you have tax-free income of £4,475. This is shown in your tax code as 447L.

HMRC usually send you a ‘PAYE Coding Notice’ that explains exactly how they have dealt with your untaxed income in your tax code.

Other income – entries on your PAYE Coding Notice

Your PAYE Coding Notice is usually sent to you before the start of each tax year. It may also be sent to you at other times if something has changed - for example, if you’ve started receiving a new source of income or a new company benefit, or if your entitlement to age-related or other allowances has changed. Entries it might include for other income to be taxed through PAYE are listed below.

Property income

Any rental income (less expenses) not covered by the Rent a Room scheme is taxable, but you receive it without tax taken off so it needs to appear here.

Interest without tax taken off

HMRC’s estimate of untaxed interest they expect you to receive shows here to make sure you pay tax on this income.

Savings income taxable at 40 per cent

Savings income is taxed at 20 per cent before you get it and dividends (income from shares) at 10 per cent. 

If you’re a higher rate tax payer you will owe the difference between 20 per cent and 40 per cent on savings income, and between 10 per cent and 32.5 per cent on dividend income. The amount shown on your coding notice under this heading has the effect of collecting the difference in both cases.

Other earnings/other income (not earnings)

HMRC’s estimate of other earnings/income they expect you to receive is included here so that the right amount of tax due on this income is collected.

Commission

HMRC’s estimate of the amount of commission you’ll earn appears here so that you can pay tax on it.

Tips

HMRC’s estimate of the amount they think you will earn in tips this year shows here to take care of the tax due.

Limits on including 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 extra income in a 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.

If you don’t want to pay tax on your other income through your tax code you can ask HMRC to stop collecting it this way and pay through Self Assessment instead.

If your other income changes significantly

If there is a significant change in your other income you should contact your Tax Office right away so that they can work out whether you need to pay extra or less tax. By contacting them early you can avoid paying too much tax or owing tax at the end of the year.

If HMRC’s estimate is wrong

If at the end of the tax year it turns out that the amount of other income you received is greater than estimated HMRC will ask you to pay tax on the difference. If it’s less, you’ll get a refund.