HMRC cuts tax-free Personal Allowance to £11,000 with one tax code change | Personal Finance | Finance
Every year, most people trying to legally cut their tax bill look for ways to boost their tax-free Personal Allowance – but there’s one employee benefit which could actually see yours cut by HMRC.
The Personal Allowance is the amount you can earn – whether from work, pensions or renting property – before you have to pay tax to HMRC. It’s been set at £12,570 since 2021 and will remain frozen until at least 2028. It means someone earning £12,000 pays no Income Tax. Then, you pay 20% on any earnings between £12,570 and £50,270, then 40% on earnings between £50,271 and £125,000, then 45% on earnings above that.
There are ways to increase your Personal Allowance, such as with the Marriage Tax Allowance, but HMRC has told taxpayers they could see their Personal Allowance actually reduced – if they have workplace benefits like health insurance.
HMRC says in its guidance: “HMRC works out your individual number based on your tax-free Personal Allowance and income you have not paid tax on (such as untaxed interest or part-time earnings). They also consider the value of any company benefits (such as a company car).
“You usually pay tax on the cost of the insurance premiums if your employer pays for your medical insurance.”
HMRC gives this example, where an employee has medical insurance from their employer worth £1,570. It doesn’t cost the worker this amount, but that’s the value of the insurance being provided by the company for free.
This medical insurance’s value would then be deducted from your tax-free Personal Allowance by HMRC with one change of tax code.
It says: “Example. You’re entitled to the standard tax-free Personal Allowance of £12,570, but you also get medical insurance from your employer. As this is a company benefit it lowers your Personal Allowance and changes your tax code.
“The medical insurance benefit of £1,570 is taken away from your personal allowance, leaving you with a tax-free Personal Allowance of £11,000. This would mean your tax code is 1100L.”
The new tax year started recently, on April 6, meaning HMRC will be catching up with people’s financial situations in the coming weeks and months and issuing new tax codes for those who had too much savings interest, or who underpaid tax, or who are yet to pay tax on a taxable benefit such as health insurance or a company car.
