Each year HMRC will issue you with a different code for each income source (job and pension). Those numbers and letters that you see on your pay slip are important. Being on the wrong tax code, means you are either paying too much or too little tax.
Understanding your UK tax code can feel like deciphering a secret message. But worry not! This blog unravels the mysteries of tax codes, empowering you to take control of your tax affairs.
Why are tax codes issued in the UK?
Most Individuals in the UK don’t complete a tax return. Income, typically a salary from employment is taxed at a source known as pay as you earn (PAYE).
To enable the employer to deduct the correct amount of income tax (i.e. PAYE) a tax coding notice is issued. These are issued by HMRC to the employer and employee.
The tax system in the UK, should ensure that the correct amount of tax is deducted and already paid. Hence, why there is no automatic requirement to complete an end-of-year UK tax return.
What is a UK Tax Code?
A tax code, issued by HM Revenue & Customs (HMRC), is a unique combination of letters and numbers assigned to every PAYE (Pay As You Earn) employee in the UK. It acts as a roadmap for your employer, instructing them on how much Income Tax to deduct from your salary each pay cheque.
Normally, there would be up to 4 numbers, and the most popular in the current tax year is 1257.
L, M, N, T, BR, D, and K are the most popular letters.
Decoding the code:
- Numbers: These represent the amount you can earn in a tax year before income tax applies. This figure is based on your personal allowance, the tax-free amount you’re entitled to each year. For the current tax year, it is £12,570.
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Letters: These Letters indicate various factors that can adjust your personal allowance:
- M: This means you receive 10% of your partner’s personal allowance (in married couples or civil partnerships).
- N: This means you’ve transferred 10% of your allowance to your partner.
- T: This means your code includes additional calculations affecting your allowance (e.g., benefits-in-kind).
- 0T: This means No tax-free allowance for this job (usually for new jobs or if HMRC lacks information).
- BR: This means all of your income from this job or pension is taxed at the basic rate, which is 20%(used in specific situations).
- D0: This means all of your income from this job or pension is taxed at a higher rate, which is 40%.
- D1: This means all of your income from this job or pension is taxed at an additional higher rate, which is 45%.
- K: This means your total benefits exceed the tax-free allowance or maybe you owed tax from a previous year.
- NT: This means, no tax is payable on this income.
Why is Knowing Your Tax Code Important?
An incorrect tax code can lead to under or overpaying tax. Here’s why understanding it matters:
- Ensures Accuracy: A correct code prevents tax discrepancies and potential penalties from HMRC.
- Budgeting and Planning: Knowing your take-home pay after tax deductions allows for better budgeting.
- Identifying Changes: If your circumstances change (new job, marriage), you can check your code reflects those adjustments.
Why Does My Tax Code Change?
Your tax code can change for various reasons, including:
- Changes in your personal allowance: These can occur due to age, claiming benefits, or starting a new job.
- Starting a new job: Your new employer may not have your full details yet, resulting in a temporary 0T code.
- Underpaid or overpaid tax: HMRC may adjust your code to recover any underpayments or prevent future overpayments.
Where I can find my Tax Code?
You can easily find your Tax code in below documents:
- Pay slip: Most employers include your tax code on your pay slip.
- HMRC online account: Sign in to your Government Gateway account to access your tax code online.
- HMRC app: Download the HMRC app for quick access to your tax information.
- Tax code notice letter: HMRC may send you a letter if your code changes
What if My Tax Code is Wrong?
If you suspect an error, contact HMRC directly. They can investigate and issue a revised code if necessary.
Tip: While this guide provides a general overview, it’s advisable to consult HMRC’s official resources Tax Codes for the latest information and personalized guidance.
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