What Does Adjustment To Rate Band Mean?
By
HuutiMoney
If you are wondering what adjustment to Rate Band means, you will find the answer to this question in the following blog post. Additionally, we will also discuss the application of an adjustment to the Rate Band and its impact on your taxable income.
What Does Adjustment To Rate Band Mean?
Adjustment to Rate Band means that a salaried taxpayer’s tax code includes an adjustment based on historical data that indicates that their taxable income is derived from two jobs or two pensions and the income from one of these jobs exceeds the Personal Allowance amount.
Therefore, the HMRC instructs the employer of the second job (the one from which the taxpayer earns a lesser income as compared to their other job) not to accommodate a Personal Allowance for the calculation of their taxable income.
In this case, the entire income is taken into account for tax deduction; without taking into account the tax-free amount of Personal Allowance as it has already been consumed while being applied to the employee’s first job.
The “rate band” indicates the range of income that is subject to a particular tax rate. For instance, during the 2023-2025 tax year, the basic rate band for income tax in the UK is £12,570 to £50,270. This means that income within this band is subject to a tax rate of 20%.
When it comes to income tax calculations, these are based on different tax bands that apply to different levels of income. Since the HMRC follows a progressive taxation system, this rate increases with an increase in income; whether your earnings are derived from one or more jobs. Under the PAYE system, a tax[ayer can be assigned two separate tax codes for each job.
However, the Personal Allowance amount (set at £12,570 for the current tax term) applies only to your primary source of income; the job with the higher amount of earnings.
Based on the dual or multiple incomes, the adjustment to Rate Band refers to the amount by which an individual’s income tax rate band is increased or decreased and may result in a decrease in their income tax liability.
Overall, the adjustment to Rate Band is a means to ensure that individuals are taxed fairly and that their income tax liability accurately reflects their financial circumstances.
How Does Adjustment To Rate Band Work In The Case Of Two Jobs?
Below is a step-by-step analysis of how the adjustment to the Rate Band works in the case of two jobs:
- Individuals with two jobs are generally assigned the 1257L tax code on their first job; the one from which they earn a higher income. The 1257L tax code indicates that the basic rate of 20% is applied to their taxable income after the deduction of the Personal Allowance amount of £12,570.
- Since the entire amount of Personal Allowance has been applied to the first job, there will be no consideration for this tax-free allowance when a taxpayer’s income from the second job is taken into account for income tax calculations.
- In this case, their second job will usually be assigned the BR, D0 or D1 tax code; depending on whether their income falls within the basic, higher or additional rate of income tax rate category. This can either be 20%, 40% or 45% of your income and will be determined by the earnings you draw.
If you think that you’ve been assigned an incorrect tax code as a result of an adjustment to the Rate Band, you should inform the HMRC. If you think you need to seek professional advice, you can easily find financial advice through free online services such as TaxAid.
Will Adjustment To Rate Band Increase Or Decrease Your Taxable Income?
Adjustment to Rate Band can increase or decrease your taxable income; depending on the circumstances. If the HMRC adjusts your Rate Band upwards, there will be an increase in your taxable income and you might even be assigned a higher rate of income tax.
On the other hand, if the Rate Band on your income is adjusted downwards, it will reduce your income tax liability.
In some cases, the reason for an increase in your Rate Band can be tax underpayments in previous years. Similarly, one of the main reasons for a decrease in your Rate Band can be tax overpayments in recent years.
Conclusion:
Adjustments to Rate Band is basically making necessary adjustments to tax codes by the HMRC so that taxpayers pay the correct amount of tax. It can impact how much income tax a taxpayer owes, as well as the total revenue collected by the Government through income tax.