Have you ever taken a look at your payslip and wondered what that strange combination of letters and numbers next to your taxable income means? Well, that is your tax code.
Knowing your tax code is important because it determines how much income tax you’ll be paying. It’s a crucial piece of information that can have a big impact on your finances.
For example, if your tax code is incorrect, you could be paying too much tax. On the other hand, if it’s too low, you could end up with a hefty tax bill at the end of the financial year.
At the best of times, tax can be tricky to get your head around. Whether it’s the self-assessment, business expenses or the many UK tax codes, each of which have different implications.
So, getting right to it, here is a simple guide to UK tax codes, to help you understand what yours means.
What is a tax code?
In the UK, your tax code is a string of letters and numbers that tell your employer or pension provider how much tax to take from your income. It’s important for employees to understand their tax code as it affects how much take-home pay they receive.
Who gets a tax code?
Anyone employed or paid via PAYE will be given a tax code by their employer via HMRC, which will be shown on their payslip. In contrast, sole traders don’t have a tax code because they don’t pay themselves through PAYE.
A list of Tax Codes and what they mean
A standard tax code in the UK is 1257L, which means that you are entitled to a personal allowance (£12,570 for 2022/23). If the code ends in an “L”, it means that you are entitled to a personal allowance of the code number times 10. (1257L x 10 = £12,570).
M: You’ve received 10% of your partner’s Personal Allowance.
N: You’ve transferred 10% of your Personal Allowance to your partner.
T: Your tax code includes other calculations to determine your Personal Allowance.
0T: Your Personal Allowance has been used or you’ve started a new job and your employer doesn’t have the details they need.
BR: All income from this job is taxed at the basic rate of Income Tax (20%). If your tax code is “BR,” it means that all of your earnings will be taxed at the basic rate. This is common for people who have multiple jobs.
D0: All income from this job is taxed at the higher rate of Income Tax (40%).
D1: All income from this job is taxed at the additional rate of Income Tax (45%).
NT: You’re not paying any tax on this income.
S: Your tax is based on rates in Scotland.
C: Your tax is based on rates in Wales.
If your tax code is less than the standard 1257L, such as 800L, it means that you have received (or at least expected to receive) some taxable benefits and the number reflects the amount that will be deducted from your personal allowance.
What’s the K Tax Code?
If you have a K tax code, it means your tax deductions already owed to HMRC from previous years or your taxable benefits received are greater than your Personal Allowance. This can happen for a number of reasons, but most commonly it’s because you receive a benefit from your employer, like a company car, which impacts your Personal Allowance. It could also be due to money owed to HMRC from a previous tax year or estimated tax owed on other earnings for the current tax year.
How do you make sure your tax code is correct?
Firstly, it’s essential to check your code regularly and notify HM Revenue & Customs (HMRC) if you spot any errors. This can be done through their website or by giving them a call.
If you’re a business owner, it’s also important to keep your personal details up to date with HMRC, such as your address and work status, as these factors can affect your tax code.
In addition, if you have multiple sources of income, such as a second job or rental property, you’ll need to make sure your tax code covers all of your income. This way, you won’t end up underpaying or overpaying tax, however this will of course be picked up on your annual tax return if you need to prepare one.
In conclusion, understanding your tax code is important as it affects the amount of take-home pay you receive. Make sure to keep track of your tax code and check if it’s accurate.
If you want more information, or have any questions, we’re happy to help you with this so get in touch today.
