Received a P800? Check how HMRC has used your allowances

Subject to specific priority rules, reliefs and allowances must be deducted in the way that gives the greatest reduction in the taxpayer’s income tax liability. This is commonly referred to as “beneficial ordering”. The order can matter because different types of income are taxed at different rates and may also benefit from separate nil-rate bands or allowances. Allocating the Personal Allowance against one source of income rather than another can therefore change the overall tax bill even where the underlying income figures are identical.

A long-standing problem with HMRC’s P800 calculation process means that beneficial ordering is not always applied correctly. The issue is particularly relevant where taxpayers have a mixture of PAYE income, savings and dividends. A P800 should therefore be checked rather than assumed to be correct. As well as confirming that salary, pension and savings figures are accurate, taxpayers should consider whether their allowances have been used against their different sources of income in the way that produces the lowest lawful tax liability. HMRC’s guidance on P800 tax calculations explains what to do where the figures are wrong. If HMRC agrees that a calculation needs changing, it can issue a revised calculation.

Anyone receiving a P800 with several different sources of income should therefore look beyond the headline figures. The income may all be correct while the way the allowances have been allocated still leaves the tax bill too high.