Do you know what your tax code means? And do you know if it is right?
Helen from Insight Finance Solutions urges you to check yours 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 some income 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 £12,500 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 1250L. 1250 is the shortened version of £12,500 (without the extra zero!).
So if you have a tax code that starts 6780 your tax free allowance is £6780 meaning you will only be taxed at source once you earn over £6780 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 £12,500 until April 2020).
- 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 1250 – 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 £12,500 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
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.
We saved our client £2000 thanks to spotting an incorrect tax code
One of the clients we have been working with at Insight Finance Solutions shared their pay slips with us when calculating their tax and assisting with their business finances.
We spotted on a recent pay slip for one of our clients, that their tax code looked a little odd. Our client shared their tax code breakdown with us and thought their tax code was right. As it happened, their tax code had been calculated incorrectly by including income which had stopped four years ago and their tax code had not changed to reflect it.
After a phone call with HMRC, they updated their records, amended the tax code and issued a tax rebate of around £2000 for overpaid tax.
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!