This article is intended as a gentle introduction to the UK tax system for immigrant workers. I've learnt a bit since I was "fresh of the boat", so I thought I'd share it in the hope that it be useful to someone. Any comments or feedback is welcome, of course ☺
In the following, I will assume that you have one and only one job, and that you get a monthly salary. Mutatur mutandis, caveat emptor, etc.
The basics
In the UK, tax is collected by a government agency called HMRC, Her Majesty's Revenue and Customs. If you're just a normal employee, your tax will be deducted from your salary payments before you even get the money through a scheme called Pay As You Earn (PAYE). The taxman is usually happy to keep the relationship at that level, but as you will see below it is sometimes to your advantage to get involved with them.
To the HMRC, you are just a number, specifically a National Insurance (NI) number. Your employer will ask you for your NI number when you start working. If you don't have one, just say so, and then try to get one as soon as possible.
While your tax will be deducted from your monthly salary, the amount of tax you pay is actually decided by your total income during the current tax year. The tax year runs from the 6th of April to the 5th of April the following year. During the tax year, you only pay tax on the part of your income that exceeds the personal allowance (£7,475 for 2011-12). You pay 20% of the amount that exceeds the personal allowance up to a certain limit (£35,000 for 2011-12), and a higher rate for the amount exceeding that limit.
On top of that, you pay a few percent of your salary for National Insurance contributions, which I won't cover in this article.
The tax code
Based on what they know about you, the HMRC assigns you a tax code,
which is used by your employer to figure out how much tax to deduct
from your salary. The tax code looks something like 747L. (If your
tax code doesn't contain three digits and the letter L, you'd be
better off reading the HMRC page than this article.)
This means that your tax-free allowance for the year is £7,479 (replace
the L with a 9), and that this should be deducted from your salary
evenly across the year. (I'm aware that I said £7,475 above, but both
numbers come from the HMRC web site, so the confusion is not my
fault. And what is £4 between friends?…)
The HMRC should send you a letter notifying you about what tax code they have chosen, and you can also find it on every payslip.
Emergency tax codes
When the HMRC doesn't have enough information to assign the correct tax code, they give you something they call an emergency tax code. The name is misleading: there's nothing "emergency" about the tax code itself; in fact, it's quite likely that you will get the same tax code once your relations with HMRC have stabilised.
And this is the part where they take your money
You could probably see this coming: if you didn't start working at the beginning of the tax year (i.e., 6th of April), your Personal Allowance will make up a greater proportion of your salary than the HMRC thinks, and thus you should pay less tax each month. Of course, this isn't something the HMRC is eager to tell you.
For example, if your annual salary is £20,000 and you work during the entire tax year, your tax for the year would be £2,505:
(20,000 - 7,475) × 20% = 2,505
which is £208.75 per month. But if you started working in October, the personal allowance cancels out a greater part of your income:
(10,000 - 7,475) × 20% = 505
Split over six months, you should pay £42.08 per month. However, if you don't get your tax code right, you'd pay £208.75 per month, and as a result you would have overpaid £1,000 by the end of the tax year.
What you can do about it
Basically, you should write a letter to the HMRC and ask them to stop taking too much money, or to pay back the amount you have overpaid.
To find out where to send your letter, you first need to know your employer's taxpayer's reference. It might be indicated on your payslip, on your P60 form (see below), or you could ask your employer. Armed with that piece of knowledge, go to the [tax office finder][tax-office-finder] and type in the code, and you'll get the address of the tax office dealing with your tax.
During the tax year in question
In theory, the P46 form that you filled in when you started working should have saved you from all this trouble, as it gives the HMRC all the information they need to work out the correct tax code, but in practice you're not always that lucky. What you can do is ask the HMRC to give you a new tax code for the rest of the year, which would result in smaller tax deductions as they "pay back" by reducing future payments.
Always quote your National Insurance number, your employer's Taxpayer Reference, your address and your phone number in your letters.
After the tax year in question
Some time in April or May, your employer will give you a P60 form, which sums up your income and your tax payments during the previous tax year. This is very useful, since it contains all the information you need to claim back the overpaid tax. Use the formulas above to calculate how much tax you should have paid, and then write them a letter containing:
- your National Insurance number
- your employer's Taxpayer Reference
- the amount of tax you should have paid
- the amount of tax you actually paid
- the amount they owe you
- bank account details for repayment (sort code, account number, branch address)
Also enclose a copy of your P60 form.
You should get your refund within a few months, unless of course they manage to lose your request somehow, in which case you need to remind them.