It may look like a random assortment of numbers and letters, but your tax code plays a vital role in determining how much of your hard-earned cash you have to hand over to HMRC. Here’s how to check that you aren’t paying more than you should.
While HMRC does their best to give you the correct tax code, they issue over 20 million codes each year – so there’s room for error. If you’re on the wrong tax code, it’s your responsibility to report it and have it corrected. There are a number of factors that can influence your tax code, with changes in retirement and savings policies largely responsible.
Know how to read your tax code
Before you are able to see if you’re on the wrong tax code, you’ll need to be able to read and understand it. Let’s take a look at this in more detail.
The numbers represent your Personal Allowance figure. This is how much you can earn before you need to start paying income tax. For example, someone with a tax code of 1100L can earn £11,000 before having to pay tax.
An easy way to work this out is to put a “£” in front of the numbers and a “0” after them.
The Personal Allowance figure usually changes on 6 April, at the start of each financial year, so it’s a good idea to keep an eye out for this.
The letters in your tax code follow the number and all have their own meaning:
|BR||Taxed at the Basic Rate of 20%||Applies to individuals with more than one income stream.|
|D0||Taxed at the Higher Rate of 40%||When you have one income stream where at a normal tax code, together with a second salary, pushes you over into the Higher Rate tax band.|
|D1||Income is taxed at the Additional Rate of 45%||You earn over £150,000 per year and have a pension or other income source.|
|L||You receive the full Personal Allowance||Your tax situation is standard.|
|M||You’ve received a transfer of 10% of your partner’s Personal Allowance||Your partner has not used up their Personal Allowance entitlement.|
|N||You’ve transferred 10% of your Personal Allowance to your partner||You have not used your full Personal Allowance amount.|
|NT||You’re not paying tax on this income|
|0T||You have been taxed on all your income||This could be because your Personal Allowance has been used up or if you’ve started a new job and don’t have a P45.|
|S||You pay the Scottish rate of income tax||You live and work in Scotland.|
|T||Your tax code includes other calculations to work out your Personal Allowance||Your tax position is “not settled”.|
How is your tax-free Personal Allowance calculated?
HMRC starts with the basic tax-free allowance of £11,000 and adds or deducts anything that could affect this total. For example, a Personal Savings Allowance and tax deductible work expenses could increase this amount, while outstanding tax bills and a state pension could decrease it.
Following this calculation, your tax code is given to your pension provider and employer to indicate how much tax should be deducted from your income.
Common reasons why you might be on a different tax code
Any situation where you receive more than one source of income could result in the allocation of the incorrect tax code. This could include:
- State andprivate pension plans
- Having more than one job at the same time
- Short-term contracts
A rise or fall in income could also result in a change of tax code. The most common reason for a change in tax code is when employees receive benefits from their employers.