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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'll automatically arrange for you to pay tax on them this way.
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Other income that HMRC may be able to tax through your tax code includes:
If you have other income that is not shown above please contact HMRC for advice.
HMRC adds 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 takes 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.
You are entitled to the basic Personal Allowance of £10,000 (the amount for the 2014 to 15 tax year) and you have untaxed building society interest of £500 and rental income of £1,500:
So, you have tax-free income of £8,000. This is shown in your tax code as 800L.
HMRC usually sends you a 'PAYE Coding Notice' that explains exactly how they have dealt with your untaxed income in your tax code.
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.
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 is shown here.
HMRC estimate of untaxed interest they expect you to receive is shown here to make sure you pay tax on this income.
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. If you are an additional rate tax payer you will owe the difference between 20 per cent and 45 per cent on savings income, and between 10 per cent and 37.5 per cent on dividend income. The amount shown on your PAYE Coding Notice under this heading has the effect of collecting the difference in all cases.
HMRC estimate of other earnings/income you are expected to receive is included here so that they collect the right amount of tax due.
HMRC estimate of the amount of commission you'll earn appears here so that you can pay tax on it.
HMRC estimate of the amount they think you will earn in tips this year shows here to take care of the tax due.
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.
For more information on the different ways of paying tax on your other income follow the link below.
If there is a significant change in your other income you should contact HMRC right away so that they can work out whether you need to pay extra or less tax. By contacting HMRC early you can avoid paying too much tax or owing tax at the end of the year.
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.
The additional rate tax applies if you have taxable income above £150,000. The rate is 45 per cent from 2013 to 14. Your 2014 to 15 tax code will take into account the 45 per cent tax rate.
If you don't normally complete a Self Assessment tax return, and you become aware during the tax year that you need to complete one, follow the link below to register for Self Assessment.