Letter from HMRC

[170872]

My mother got a letter from HMRC asking her to pay extra tax amounting to more than 1K for the year 2008/2009, 2009/2010,2010/2011.

For the tax year- 2008/2009 she received a state pension of 5,291 and a salary of 8,601 for secretarial work from my brothers business where a tax of 387.20 has been deducted at source. Her personal allowance entitlement on HMRC letter is 9,030 and I assume due to her age above 65.

She is now required to pay 585.20 of additional tax. She has similar problem in other tax years as well.

Is there any possibility to structure in this way for future so that she does not pay extra tax:
Take a salary of 3,739 (9030-5291) and my brother gives her 4,800 by way of gift (in money). I read gifts are exempted for Income tax purposes.

Or is there any other ways so that she does not pay extra tax? or to call HMRC to change her tax coding so that higher tax is deducted at source so that no surprise letters like this for the future?

Your view are much appreciated

Thanks you

[section 44]

Gifts are not subject to income tax in the hands of the recipient nor are they generally tax deductible for the payer. Clearly, it goes without saying that he gift would have to actually be a gift (e.g. not employment related).

[JRG]

For 2008/09 your mother’s total income was £13,892 (£5,291 + £8,601), and her taxable income was £4,862 (£13,892 - £9,030), which at 20% results in an income tax liability of £972.40. Deducting £387.20 for income tax paid, leaves £585.20 to be paid, as per HMRC’s letter.

If she was paid under PAYE then her tax code should have been 373P at the most (i.e. P.A. £9,030 - S.P. £5,291 = £3,739). Why was her income tax paid figure so low? What was the tax code on her P60?


As regards the idea of giving a ‘gift’ of money in lieu of salary, I’m sure HMRC will look on this as tax evasion, which is illegal.


In future double-check your mother’s tax code on HMRC’s Notice of Coding. This will usually be no more than Personal Allowance less State Pension.

Also ensure your brother’s business applies the correct tax code to her payslips & P60. That way the correct amount of income tax will be paid each year.

[section 44]

As regards the idea of giving a ‘gift’ of money in lieu of salary, I’m sure HMRC will look on this as tax evasion, which is illegal.

Some big assumptions. Nobody mentioned a gift being in lieu of salary. Tax evasion? The jails must be full of people employed by family businesses after the Christmas period.

[King_Maker]

It is not clear (to me at least) how these tax errors occurred - without sight of the relevant Notices of Coding.

However, there appear to be 3 likely alternatives :

1. Incorrect Code(s) operated by your brother.
2. Incorrect Code(s) issued by HMRC.
3. Combination of 1. & 2.

If HMRC are at fault, ESC (Extra Statutory Concession) A19 may assist.

http://www.hmrc.gov.uk/esc/esc.htm

If not, the "gift" route might be a possible route given the family connection - although your brother will not receive any tax deduction for it.

The more usual route, for non-family connections, is to "gross up" (for Income Tax, but not NI in your mother's case) the relevant amount so she receives the appropriate net figure. Although your brother will have to pay the extra employer's NI, his business will receive an Income Tax deduction for it plus an Income Tax deduction for the extra salary/bonus.

I suggest you try to discover what went wrong.