If you have received a P800 tax calculation from HMRC, it is worth reviewing it carefully. In some cases, HMRC’s calculations do not allocate tax allowances in the most tax-efficient way, which can result in an excessive tax charge.
This issue most commonly affects individuals who receive income from several sources, such as employment, pensions, savings interest and dividends.
Under tax legislation, certain reliefs and allowances must be set against income in the manner that produces the lowest overall tax liability, subject to specific statutory rules. This principle is often known as “beneficial allocation” and can make a significant difference where different categories of income are taxed at different rates.
For example, the way the Personal Allowance is divided between employment income, pension income, savings income and dividends can affect how much tax is due. Although a taxpayer’s total income remains the same, a different allocation of allowances may reduce the overall tax bill.
Unfortunately, HMRC’s P800 process has long been known to apply these rules incorrectly in some circumstances. Taxpayers with a combination of PAYE income, bank interest and dividends may be particularly affected.
For that reason, a P800 should not automatically be accepted as correct. As well as checking that all income figures have been included accurately, taxpayers should review how HMRC has used their Personal Allowance and other reliefs to ensure they have been allocated in the most advantageous way permitted by the rules.
Where errors are identified, HMRC can review the calculation and, if appropriate, issue an amended P800 showing the correct amount of tax due.
