Understanding your tax code is essential as it determines how much income tax you pay and the accuracy of your National Insurance (NI) contributions.
Whether you’ve recently started a new job, seen a difference to your wage or simply want to ensure you’re paying the right amount, we’re here to help.
In this guide, we’ll be explaining all you need to know about your tax code, including what to do if you believe your tax code is incorrect.
What is a Tax Code?
A tax code is a combination of numbers and letters assigned to you by HMRC that indicates how much Income Tax and National Insurance you must contribute.
Tax codes signify the level of tax-free earnings you are entitled to within a given tax year- also known as your ‘personal allowance’. Any income above this threshold is subject to taxation.
Should I Have a Tax Code?
If you are an individual who is employed or receives payments through PAYE (Pay As You Earn), you should receive a tax code from your employer via HMRC. This will be displayed on your payslip.
Sole traders, however, don’t have one as they do not pay themselves through PAYE.
Is My Tax Code Correct?
Determining the correct code can be a challenging task, as it is unique to each person’s circumstances. Several factors contribute to this, including your:
- Personal allowance
- Income from other sources
- Taxable benefits
- Outstanding tax liabilities from previous years
- Other considerations
HMRC typically issues an annual notice, along with explanatory documents that detail why your tax code may differ from the standard for the current year.
If you haven’t received a notice, you can use the government website to find out your code, but please note that this tool is only applicable if you are employed and paid via PAYE.
Understanding Your Tax Code
What Does the Number Mean?
Your tax code begins with a number. This number refers to the personal allowance you are entitled to (and is divided by ten).
For example, if yours is 1257L, you can earn £12,570 before your income becomes taxable.
What Does the Letter Mean?
After the number, your tax code will be followed by a single letter, or multiple. This refers to your individual circumstances and how your personal allowance is affected.
Common Tax Codes Letters and What They Mean
There are a number of UK tax codes, each of which mean something different. Here they are at a glance:
- L: You’re entitled to the standard tax-free Personal Allowance (£12,570 for 2023/24)
- 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%)
- 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
- K: The amount you owe HMRC in deductions from previous years exceeds your Personal Allowance.
Emergency Tax Codes
An emergency tax code is used when HMRC has not yet worked out which one applies to your circumstances as a temporary measure.
This could be for the following reasons:
- You’re starting your very first job
- You’ve started a new job and haven’t got your P45 from your old employer
- You’ve become an employee (and are now paid via PAYE) after being self-employed
- You get company benefits (like a company car)
- You receive the state pension
You can expect one of the following if you have been placed on emergency tax by your employer:
- 1257 W1
- 1257 M1
- 1257 X
How Do I Change My Tax Code if it is Incorrect?
If you believe your tax code to be incorrect, such as if HMRC is including taxable benefits from previous years that you no longer receive, it is important to contact HMRC directly to discuss the matter and request it be amended.
This is crucial as being on the wrong one can result in either overpaying or underpaying your taxes.
Tax Guidance at Ryans
At Ryans Chartered Accountants, we can provide personalised guidance to ensure that individuals are on the correct tax code, minimising the risk of overpaying or underpaying taxes.
With our professional assistance, you can have peace of mind knowing that your taxes are in capable hands. Get in touch with our team today to find out more.