Confusion about UK tax codes

My husband and I (both US citizens) moved to the UK on Aug 31, 2009. At that time, my husband began working for a UK company. They recently informed him that he had been taxed incorrectly (his paycheck indicates a “BR” tax code), and they are taking steps to remedy the situation.

My husband’s yearly salary is greater than 37,400 GBP, and will therefore put him into the 40% tax band. However, since he has only been working for five months, he has not yet crossed this income threshold.  So far, he has been taxed at a 20% rate.

Is the 40% rate charged on his entire income, or only the excess above 37,400?

And once he has earned more than 37,400, will his tax code change?

Thanks to anyone who can provide some info on this matter!

I think it should be based on his monthly salary, so the amount he has been taxed and his tax code should have been correct from day one. He is most likely on the BR tax code (20%, I believe) because he didn't have a P45 from a previous UK job when he started working (I am a UK citizen but was wrongly on the BR rate for almost a year after graduating from university as I had sent off my previous P45 for a tax refund from my vacation job). His code needs to be changed from BR to the correct code (should be fairly easy and something he may be able to sort out himself with a call to his tax office.... mine was fixed within a couple of weeks and I received a cheque for the excess tax I'd paid within a month) and then he will be taxed accordingly for the last 5 months, paying back any tax money he owes.

The 40% rate should only be charged on the income above 37,400, so he shouldn't get taxed at all for the first 6,475, then 20% on the income between 6,475 and 37,400, and then 40% on the income over 37,400. However, if his income minus 6,475 falls below 37,400, then he will only be charged the 20% rate (I believe he needs to earn more than 37,400 after the tax-free allowance of 6,475 has been deducted to be taxed at 40%).

You can calculate how much tax he should be paying here: http://listentotaxman.com/

Just for clarification, say your UK income from 6 April 2009 to 5 April 2010 is £50,000:
The first £6,475 is tax free.
The next £37,400 is taxed at 20% (£6,475 tax free + £37,400 at 20% = £43,875).
The next £6,125 (£50,000 - £43,875) is taxed at 40%.

So your taxes would be:
£37,400 at 20% = £7,480
+£6,125 at 40% = £2,450
or a total of £9,930 tax due.

Don't forget any interest you may have received from a UK bank or building society account. If you received £5, HMRC will want tax on it. In the above example, the tax on the £5 would be at 40%. If your total income (wages + interest) was below £43,875, but above £6,475, it would be taxed at 20%.

And don't be afraid to call HMRC if you have any questions. They're quite helpful.

I am not a tax professional, only a punter, so if I'm wrong about any of this hopefully the qualified people on this site can correct me. 

ksand24 and theOAP, thank you *so much* for your helpful replies! That really clears things up.

So, WOW, all of our UK interest will be taxed at 40%?  I didn't expect that.

Will the interest we earn on our US bank accounts also be taxed by the UK? (Please, please, please say no...)

Is the 40% rate charged on his entire income, or only the excess above 37,400?

And once he has earned more than 37,400, will his tax code change?

40% is only on the excess.  

It shouldn't be the case that he gets a new tax code once he goes over 37400.  What should happen is that the tax code is issued for the entire year, taking into account the salary earned in that year and the correct tax is taken out each month.  This didn't happen which is why he needs a correction.

Technically speaking, the tax code should come from HMRC, directly to the employer.  When someone starts a new job and the employer doesn't have a tax code for them (or a P45), it isn't unusual for them to do BR.  Your husband really should get HMRC to issue the correct tax code and handle it that way.  Your employer shouldn't really just be adjusting themselves (again, technically speaking).

Do not also be surprised if they try to take the adjustment all in one pay period as well, to account for the underwithheld tax.

Will the interest we earn on our US bank accounts also be taxed by the UK? (Please, please, please say no...)

This is not a straightforward answer.  I

t depends on how you file your UK tax return.  You can file your UK tax return to exclude your non-UK income, but there are repercussions for doing so (loss of personal allowance, until you have been here for greater than 7 tax residence years).  Excluding non-UK income is on the proviso that you do not bring it into the UK in any form (i.e. you cannot remit it to the UK).  If your non-UK income is less than £2000, you can continue to exclude it from UK taxation and not suffer the loss of the personal allowance.

Technically speaking, the tax code should come from HMRC, directly to the employer.  When someone starts a new job and the employer doesn't have a tax code for them (or a P45), it isn't unusual for them to do BR.  Your husband really should get HMRC to issue the correct tax code and handle it that way.  Your employer shouldn't really just be adjusting themselves (again, technically speaking).

Do not also be surprised if they try to take the adjustment all in one pay period as well, to account for the underwithheld tax.

Actually, his employer seemed to indicate that they OVERwithheld tax and he would get a refund.  It looks like the BR code caused him to be taxed at 20% on all of his income, with no personal allowance. He hasn't yet made more than 37,400 GBP, so he shouldn't be taxed at 40% yet, correct? I just want to clarify this, so we know what to expect when it's "corrected."

I'm not sure how his employer is handling this correction, but it sounds like they may be issuing a new P45 with the correct tax code. (?)

This is not a straightforward answer.  I

t depends on how you file your UK tax return.  You can file your UK tax return to exclude your non-UK income, but there are repercussions for doing so (loss of personal allowance, until you have been here for greater than 7 tax residence years).  Excluding non-UK income is on the proviso that you do not bring it into the UK in any form (i.e. you cannot remit it to the UK).  If your non-UK income is less than £2000, you can continue to exclude it from UK taxation and not suffer the loss of the personal allowance.

Thank you, Sara. I didn't even realize we had to file a UK tax return, since it appears that my husband is on the PAYE system.

Actually, his employer seemed to indicate that they OVERwithheld tax and he would get a refund.  It looks like the BR code caused him to be taxed at 20% on all of his income, with no personal allowance. He hasn't yet made more than 37,400 GBP, so he shouldn't be taxed at 40% yet, correct? I just want to clarify this, so we know what to expect when it's "corrected."

I'm not sure how his employer is handling this correction, but it sounds like they may be issuing a new P45 with the correct tax code. (?)

You may be slightly mistaken how PAYE works.  You don't get tax withheld at 20%, until you hit 37400 and then your tax withheld changes to 40%.  Your annual salary is considered and more or less your entire tax bill is calculated, then 1/12th is taken each month.  So you have a mixture of 20% and 40% tax. 

Working in whole numbers -- say your husband earns £50k and for the sake of this example, pretend that the first 40k is at the 20% tax rate.  So his total tax bill would be 40000 x 20% and 10000 x 40% = 12000.  Thus each month, he would have 1000 deducted from his pay.  This 1000 represents the proportion of income at 20% and the proportion at 40%, all mixed together.  It isn't the case that he is only taxed at 20% until month 10 when he hits over 40k.

None of us will be able to tell if he is due a refund of needs additional tax withheld because we don't know his annual salary for 09/10, nor how much has been withheld so far.  That is why the other posters gave you information to calculate it yourself. 

I hope this makes sense!

Aah, I see, that makes sense. I didn't realize that the tax bill was calculated for the entire year, and then divided into 12 payments.

So, hypothetically speaking, if he leaves his job before the year is up, he must still pay the tax rate (the mixture of 20% and 40% tax) AS IF he had earned the full amount?

So, hypothetically speaking, if he leaves his job before the year is up, he must still pay the tax rate (the mixture of 20% and 40% tax) AS IF he had earned the full amount?

Nope, this is just how the tax coding works.  You are still only liable based on what you earned but you would need to settle the difference between what was withheld and what is actually owed via a tax return.  In some cases, HMRC will calculate this for you and a tax return isn't needed but since you have non-UK income issues anyway, I see a UK tax return in your future!

So, hypothetically speaking, if he leaves his job before the year is up, he must still pay the tax rate (the mixture of 20% and 40% tax) AS IF he had earned the full amount?

I don't think so - I currently earn 1,125 per month before tax and NI. If I work a full month, I am taxed 117.08 and also pay 71.36 in National Insurance. However, this month I am taking unpaid leave (as I am travelling) and so will only be paid for 1 week of work (actually it's holiday pay). As a result, on Feb 20th, I should be paid for 1 week of work  (259.62) less 1 week of tax (27.02) and NI contributions (16.37). So every other month of this year, I will pay 117.08 in tax, but for February, I will only pay 27.02.

Similarly, I was due to start a new job in April, but the contract was withdrawn at the last minute. As a consolation, I will be paid 1 months' salary, less tax and NI. The tax and NI taken off will only be 1 months' worth, not a full years' worth (if they took off a whole years' worth, I would owe them money instead!).

Similarly, I was due to start a new job in April, but the contract was withdrawn at the last minute. As a consolation, I will be paid 1 months' salary, less tax and NI. The tax and NI taken off will only be 1 months' worth, not a full years' worth (if they took off a whole years' worth, I would owe them money instead!).

I think at09's question (or at least, my question based on this thread), is:
- say you earn £50k/yr, so you're taxed each month for 1/12th of the 20%/40% mixture
- you leave your job after 8 months, having only earned £33k

Presumably, since you only earned £33k, you shouldn't owe any taxes at 40%, except that you've already paid 8 months of 20%/40% taxes, so you'd file with HRMC for a refund at that point (to get the extra 20% that you paid for 8 months)?

Thanks for the replies!

equestrianerd, yes, that's exactly my question--although you expressed it much more clearly!

Presumably, since you only earned £33k, you shouldn't owe any taxes at 40%, except that you've already paid 8 months of 20%/40% taxes, so you'd file with HRMC for a refund at that point (to get the extra 20% that you paid for 8 months)?

In a nutshell, yes. Provided the 8 months of income is the only taxable income you have for the entire tax year, the calculation would be:
£33,000 - £6,475 (personal allowance) = £26,525 x 20% = £5,305 tax owed.
HMRC would have deducted through PAYE £6,620 for the first 8 months (£9,930 taxes due on £50,000 divided by 12 = £827.50/mo. x 8 months = £6,620).
Your refund would be (£6,620 paid - £5,305 actual tax) = £1,315.