Published in Debt Advice Features on Thursday, March 29 2007

In bankruptcy another thing that you will not pay once you have had a bankruptcy order made against you is income tax if you receive you salary under PAYE. You will not pay income tax for remainder of the financial year.

Once you have been declared bankrupt, HM Revenue and Customs (HMRC) will be notified that you are now bankrupt and they will apply a “nil tax” code for the rest of the tax year in which you were made bankrupt.

HMRC will tell your employer not to take any more income tax out of your salary the reason why you will not pay tax is for a few reasons, one of which is to give you more financial freedom while you are bankrupt and give you the opportunity to get back on your feet.

The nil tax code does not mean that no income tax is due, instead it enables HMRC to claim the whole of your unpaid tax for the time you are bankrupt.

Note: The “Nil Tax” code will not tell your employer that you are bankrupt.

With you not paying income tax through your salary you will obviously have extra money each week or month in you pay packet. This extra money can allow you to pay into your bankruptcy through an IPA or IPO, even if before the Nil Tax code you did not have any real disposable income.

Through a Nil Tax (NT) code being applied this would allow you to pay money each month to the Official Receiver and this amount may only be the only thing you would have to pay.

One benefit to this is that if you are asked to make a payment through an IPA or IPO, then you would not normally make the payments for 36 months, you would make payments for the time while the NT tax code is in place or your tax code changes.

Here is an example as to what you could be likely to pay.

If you were made bankrupt in April 2006 you would have an NT tax code from May 2006 until the 1st April 2007. Lets say you completed an income and expenditure for the Official Receiver and it was identified that you had around £400 of disposable income, it would be likely that you would have to pay around £200 per month into an Income Payments Agreement or Order.

With the extra money you had in your salary from you being on a NT tax code (lets say £350pm)

You would be expected to pay £200 per month for 36 months in an IPA or IPO in addition to making payments to the Official Receiver from the extra money of £350pm for 10 months until 1st April 2007. After which time you would stop making the £350 per month and carry on making the contributions into the IPA or IPA.

One exception that may arise is that if you declared yourself bankrupt a couple of months before the beginning of the next financial or tax year. If this was the case then it is highly unlikely that you would be put onto a NT tax code.

If you do not have any disposable income but you go onto an NT tax code then you would make the contributions until the next financial year starts.

Either way if you had lots of unsecured debt and there would be no way prior to your bankruptcy that you could have paid them back over a realistic timescale then bankruptcy and the repayments you would need to make in bankruptcy would be more beneficial to you financially than if you did not petition for bankruptcy.

Always get debt advice prior to making the decision to go bankrupt, bankruptcy should not be taken lightly and could have a huge negative affect on you and your family if you took this avenue.