HMRC will determine the amount of tax that must be withheld from your salary based on the tax code that you have. Find out what it means to have yours, how to check it, and what to do if it turns out that your tax code is incorrect.
What is the meaning of a tax code?
On your payslip, typically in close proximity to where it lists your National Insurance number, you will see your tax code. If you enter the incorrect tax code, you run the risk of being subject to a higher rate of taxation than is necessary because this rate is determined by the amount of PAYE (Pay As You Earn) tax that is applied to your wage.
Under this system, the tax is withheld straight from your earnings or the company or private pension you get before the money is given to you.
This article will walk you through the process of deciphering tax codes, including what each letter of the code stands for and what to do if you believe you have been given the incorrect code.
A listing of tax codes together with their explanations
Find out what the letters in your tax code stand for and how your taxes are going to be calculated by looking them up.
If you were born after April 5, 1948, you are eligible for the basic personal allowance that applies to those born after that date.
In 2022-23, the tax code 1257L will be the most popular one. This code will be used by the majority of people who have one job and do not have any taxable perks, untaxed income, or unpaid taxes.
This represents the personal allowance, which is currently set at £12,570.
You’re given no personal allowance. If you do not present your employer with a P45 or enough information for them to calculate your tax code, or if your personal allowance has been depleted due to past income, this will occur.
DO or BR?
Your entire pay coming from this source is subject to taxation at either the basic rate (BR) or the higher rate (DO). This is due to the fact that all of your allowances have already been used up, which may be the case if you also receive a pension while working or if you have a second job.
Your entire income from this source is subject to taxation at the higher rate. This is due to the fact that all of your allowances have already been used up; for example, if you have more than one income, this will be the case.
The sum of all of your deductions is more than your allowances. In the event that the amount of untaxed income on which tax is still owed is higher than the annual allowances that you are allotted, you will be issued a K code in order to ensure that you pay tax on the excess income.
When compared to the numbers in other tax codes, the number in a K code multiplied by 10 provides a general indication of the amount that needs to be added to your taxable income to account for the excess untaxed income you got. Visit the website of HMRC for further information.
You are eligible for the Marriage Allowance, which entitles you to receive ten percent of the personal allowance that is given to your spouse or civil partner (which is 1,260 pounds in 2022-23).
You have decided to make use of your Marriage Allowance to give ten percent of any ‘unused’ personal allowance to either your civil partner or spouse.
On this income, you do not have to pay any taxes. This is only utilised in very particular scenarios, such as the situation of musicians who are considered to be self-employed and are therefore exempt from PAYE taxes.
In Wales, residents are subject to income tax.
You are subject to the income tax at the rate that applies in Scotland because you live there.
In the event that the tax office wants to evaluate your tax code – for instance, because your tax affairs are complex or your expected annual income is more than £100,000, which would impact the amount of personal allowance you’re entitled to – this is the form that will be utilised.
You also have the option of requesting a T code so that your personal information can remain private.
W1 or M1
These are what are known as “emergency tax codes,” and they can be found at the conclusion of your tax code. They stand for either “week 1” or “month 1,” depending on how frequently you are paid (weekly or monthly). These codes indicate that you are not being taxed on a cumulative basis; rather, you are just being taxed on the amount that you have earned in that specific payslip.
For further information, please refer to our guidance on emergency tax codes.
Verifying your tax filing status
HMRC is the organisation that will supply you with a tax code; after that, it will communicate to your employer or pension provider the code they should use to ensure that the appropriate taxes are collected.
Alongside the information regarding your pay or pension, a tax code will often be printed on your payslip. Additionally, it will be included on the coding notice that HMRC may send you, the P60 that you will receive after the end of the tax year, and the P45 that you would receive if you switch jobs.
Each and every tax code is composed of both letters and digits.
For example, the number 1257 should show how much tax-free pay you are permitted to earn in each tax year. As a general rule of thumb, you need to multiply the number by 10 to get the total amount of income you can receive each year before it is subject to taxation.
Because the personal allowance for the fiscal year 2022-2023 is set at 12,570 pounds, the relevant number for many workers is 1257.
Your employer will have access to additional information regarding the types of allowances you are eligible to receive or the tax rate that should be charged as a result of reading the tax code letter.
Learn more about the tax-free income and allowances, as well as the amount of money one can earn before having to pay tax.
What should you do if you have the incorrect tax code?
Contact HMRC if you have any reason to believe that the tax code you were given could be incorrect.
You are the one who is responsible for ensuring that your tax code is accurate. If you have paid more in taxes than you were required to, HMRC will send you a refund check in the mail.
You will, in most cases, be refunded through a change to the tax code, which means that you will pay less tax and will, as a result, earn a larger portion of your wages. If, however, the refund is for an earlier tax year, the IRS will mail you a check instead.
In the event that you have paid too little in taxes, you will almost certainly be required to make up the difference. Either putting you on an emergency tax code or sending you a tax bill could accomplish this goal. Both options are on the table.
Learn more about it here:
Use this calculator to determine how much income tax you are obligated to pay.
What prompted the update to your tax code?
There are a number different scenarios in which HMRC could modify your tax code. These are the following:
Beginning a new job when your new company does not have a P45 can cause an emergency tax code to be generated. This is because there is insufficient information to determine how much you have earned and how much tax you have already paid during the tax year.
Receiving an income from a second job or pension: if the money you receive from your first work causes your personal allowance to be depleted, the tax code that applies to your second income may be different.
Increasing or decreasing your income can have an impact on the amount of tax that you are responsible for paying.
If you begin or stop receiving benefits from your employer, this may have an impact on the amount of money that shows up on your payslip and, as a result, the amount of tax that you are required to pay.
Beginning or terminating state benefits that are subject to taxation includes the state pension, widow’s pension, widowed parent’s allowance, bereavement allowance, incapacity benefit, employment and support allowance, and carer’s allowance.
If you have been assigned an emergency tax code, the HMRC will modify it as soon as it has sufficient information to do so. When your tax code has been modified, you will be notified via a coding notice that has been sent to you.
Learn more about emergency tax codes, including what they are, what they mean, and what you should do if you think you may be paying too much in taxes.
What exactly is a code notice for PAYE?
You can get a PAYE coding letter in the mail from HMRC if your tax code is changed. These notices are sent out whenever your tax code is changed.
This provides information on the exemptions and deductions to which you are eligible and which were taken into account while calculating your individual tax rate.
You need to verify these particulars very carefully, as any errors could result in your having to pay a different amount of tax than you should have been.
In most cases, coding notices are delivered between the months of January and February. This ensures that any modifications may be implemented in time for the start of the next fiscal year in April. However, if the tax regulations or your circumstances change at another period during the year, you can get a coding notice at that time instead.
It’s possible that you won’t receive a coding notification at all. If the first letter of your tax code is L, P, V, or Y, your employer may be able to change your code without ever notifying you.
Tell HMRC your concerns if you believe the information on your coding notice is incorrect. You have the option of filling out the form online or calling the number 0300 200 3300.
What should I do if I am eligible for more than one tax code?
If you have more than one work or pension, you will need to obtain additional tax identification numbers (ITINs).
Regardless of the type of income that HMRC determines to be your primary source of income, your personal allowance will still be taken into account. If you wish your personal allowance to be transferred to a different job or pension, you will need to submit a request to HMRC in order to do so.
If you’ve already used up your personal allowance at your first job, the person who pays you your second income may be given the instruction to withhold tax at either the basic rate (20 percent) or the higher rater (40 percent), using the BR or DO code, respectively. This happens if you’ve already used up your allowance on the first job. This indicates that you will be required to make tax payments on the total amount of money you receive.
How exactly do tax-free allowances impact my individual tax return?
Allowances that are not subject to taxation have the potential to modify one’s total taxable income and, consequently, the amount of tax that must be paid.
These may include the following:
Allowance for personal expenses
The allowance for blind persons
Donations to good causes
Interest payments on loans that meet the requirements
Learn more about it here:
tax reliefs – learn more about the many types of payments that might reduce the total amount of income tax that you are responsible for paying.
Expenses related to your employment and the tax code
If you pay specific expenses to enable you to accomplish your job, HMRC may also include these in the allowances and reliefs that are included in your tax code. This is because HMRC recognises that certain expenses are necessary.
You are only allowed to file a tax deduction for items that are utilised solely in the course of your employment and not in any other aspect of your life.
If your employer has given you another option, you are not allowed to submit a claim for the goods that you have already spent money on.
You have the ability to make a claim up until the end of the fourth tax year after the year in which the money was spent, but you are required to keep documents and receipts.
If your company pays back your expenses, you can’t claim tax relief.
You have the option of submitting a self-assessment tax return or using form P87 for claims that are up to £2,500. In most cases, money will be returned to you as a result of adjustments made to your tax code. These refunds can occur either in the current tax year or the next year.
You are need to file a self-assessment tax return in order to make any claims that are greater than £2,50. In the event that you do not typically fill one in, you will be required to register with HMRC in advance. You will be eligible for tax relief through the provisions of your tax code for both the current and the following tax year.
Calculate your expected tax liability, see where you may be able to cut costs, and send your return to HMRC
Your tax code as well as any fringe benefits
The Internal Revenue Service (IRS) may utilise your individual tax code to assess and collect tax on the “fringe” (non-cash) advantages associated with your work, such as a company car, housing, loans, or medical insurance.
After deducting these advantages from your allowances, you will have the total amount of taxable income that you are eligible to receive in a given tax year. The tax code that you choose may also be used to collect additional taxes that are owed, such as taxes that you may have underpaid in past years or taxes on savings that are levied at a higher rate.
Your company is obligated to provide you with a copy of your P11D form for your personal records. You are required to maintain these particulars for a period of two years following the conclusion of the tax year to which they pertain.
Notify HMRC immediately if you begin or stop receiving benefits through your employer, as this may entitle you to a different code.