Is your tax code costing you dearly? Insight Financial Solutions

The new tax year began on Tuesday 6th April 2021 and there are many changes that tax payers need to be aware of for the upcoming tax year, one of which is a change in personal tax allowances and tax codes.

If you are employed on a full or part-time basis, or you receive a private pension, you will receive a tax code notice each year. You should have already received your new tax code via letter from HMRC, although if your circumstances have changed over the past year such as moving jobs or claiming certain benefits for the first time, these may not be completely accurate.

Do you know what your tax code is? Do you know what it means? And do you know if it is right?

Helen from Insight Finance Solutions urges you to check your tax code as it could be costing you thousands.

 

What even is a tax code?

If you’re an employee you will be issued with a tax code which lets your employer know what tax and national insurance to deduct from your wages and pay over to HMRC on your behalf through ‘Pay As You Earn’ (PAYE). If you’re self employed you wont have a tax code as you’re responsible for paying your own tax to HMRC via Self Assessment.

Your tax code is assigned to you and tells HMRC and the people who do your payroll how much tax to deduct from your earnings.

This tax code is based on a set of personal circumstances. For example, if you:

  • work for an employer but you have other income e.g. from a rental property
  • you have some income from shares
  • you have other investments that generate income
  • you have a second job
  • you have a state pension
  • you claim any benefits
  • you have a company car

This will be reflected in your tax code.

 

How do I know what my tax code is?

On your pay slip from your employer will be a tax code made up of a number and letter.

The number tells us how much tax free allowance you get.

This current year the standard tax free allowance is £12,570 across the UK. Therefore for most people who have standard earnings with none of those circumstances listed above your tax code is likely to be 1257L. 1257 is the shortened version of £12,570 (without the extra zero!).

So if you have a tax code that starts 678 your tax free allowance is £6,780 meaning you will only be taxed at source once you earn over £6,780 in a tax year (pro rata).

 

What do the letters mean on my tax code?

  • L means that you are under 65 and eligible for the standard tax-free personal allowance – this is the amount you can earn before income tax kicks in (currently £12,570 until April 2022).
  • P is used for those aged between 65 and 74 and getting the full personal allowance.
  • Y is for those 75 or over and getting the full personal allowance.
  • V is used for those aged between 65 and 74 and eligible for both the full personal allowance and the married couple’s allowance.
  • K means you get no tax-free pay because your income exceeds your personal allowance.
  • T means HMRC needs further information so cannot allocate another code.
  • BR means that you are taxed at the basic rate
  • DO means you are taxed at the higher rate without allowances (usually used for a second job or a pension)
  • W1 is an emergency tax code, issued if HMRC does not have enough information about you to send your employer the correct code. The first part of the emergency tax code is 1257 – the same as the basic personal allowance code. W1 means weekly pay
  • M1 as above but this is if you are being taxed as if it is the first week or month of the financial year. You may be put on an emergency tax code if you change jobs
  • NT means you earn less than £12,570 and you won’t have to pay income tax – this will be indicated by the NT in your tax code. You may also see NT if you’re a self-employed contractor who is required to pay national insurance but not income tax

Will I receive a refund if my tax code is incorrect?

It is possible that if your tax code is incorrect, you could be entitled to a refund for the overpayments made via PAYE. Keep in mind that although correcting a tax code could mean you’re due a refund, it could also lead you to find out that you have been underpaying your income tax. If you have been underpaying, you will need to arrange repayments with HMRC, dependant upon how much is owed and how HMRC deal with your individual case.

It is NOT your employer’s responsibility to get your tax code right

There is a misconception that your employer is responsible for getting your tax code right. Unfortunately it is not true. You and only you are responsible for ensuring you are on the right tax code.

HMRC will send you a notification of what your tax code along with a breakdown of how it’s been calculated. A copy of this breakdown won’t be sent to your employer, only the tax code for them to use for PAYE deductions.

It is your personal responsibility to ensure that your tax code is correct. It is not up to your employer to check that. They only see the income you get from your employment with them, not any other potential income. As you are the only person who knows your total income, the responsibility lies with you and not your employer or HMRC to ensure you’re on the right tax code.

You should be able to go to the person doing your payroll and ask for basic help with the tax code (depending on how good and nice they are) or you can go on HMRC website, call them or speak to an accountant who might know more about tax codes and get it checked.

 

Let HMRC know as soon as possible if your personal circumstances have changed

If your personal circumstances have changed this may have affected your tax code.

For more information about tax codes please visit the HMRC website here: https://www.gov.uk/tax-codes

 

Please share this article with your friends, relatives and colleagues in employment. It could just save them thousands!