Tax codes are something that are generally misunderstood. These numbers however are very significant especially when it comes to your take home pay. In this blog I’m going to explain the various tax codes and how you can check you’re on the correct code.
So… what is a tax code?
A tax code is used by your employer or pension provider to work out how much income tax to deduct from your pay/pension. Your tax code will start with a number and end with a letter. The generic tax code for this year is 1150L, this is used for people that have only one job or pension. This codes means that you’re able to earn £11,500.00 before tax.
How the code is worked out
The number in the tax code is the most important this tells you employer how much tax free income you get in that particular tax year.
The number varies if:
- You have underpaid tax on a previous year
- You have more than one job or receive a pension
- You have a benefit (Company car, medical insurance etc)
You may not be aware of this but the letter at the end of the code also means something. This can also vary dependent on your present circumstances, here’s a list of the various letters you will come across:
- L – This is the standard letter and means you are entitled to the standard tax free personal allowance
- M – This is a fairly new letter and means that you have successfully registered for the marriage allowance and received part of your partners personal allowance (I will go into this in more detail further through the blog)
- N – This means you have also registered for the marriage allowance but in this case you have transferred part of your allowance to your partner
- S – This letter is used if you’re a Scottish taxpayer
- T – Generally signifies that you have more than one employment and your code is split.
- 0T – this is also known as ‘unknown’ or emergency tax, so you may have started a new job and your employer may not have the details they need to put you on the correct tax code. This letter is usually only short term until an employee provides a starter checklist or P45 from previous employment.
- BR – All your income is taxed at basic rate (20%) employers usually put new starters on this if they say they have more than one employment. The revenue will then split the code and transfer the employee to a T code as mentioned above.
- D0– All income is taxed at 40%, this is the code used for higher rate tax payers
- NT – Any income on this code is not taxable (no tax)
As you can see there are many different letter codes but they all have their individual meanings and once you get to grips with them they are not as complicated as you first thought.
What if your tax code has W1 or M1 at the end?
W1 stands for week 1
M1 stands for month 1
This means you will pay tax on all income in that particular week/month above the personal allowance (basically these tax codes are not worked out on a cumulative basis)
Your tax code will contain these letters if you have started a new job in year and haven’t provided a P45, you have started to work for an employer after being self-employed or you are receiving benefits
K codes… they are a different story
K codes mean you have income that isn’t being taxed in any other way and is worth more than your tax free personal allowance. You will be put on a K code if you:
- Have a company car
- Are paying tax back that you owe from a previous year through your code
Earlier in the blog I mentioned the ‘M’ code this is something more people should be aware of because it’s a way of paying less tax (Winner all round!)
If you’re married and your partner earns less than £11,500.00 per year then you can register for the marriage allowance. This means that your partner can transfer £1,150 of their personal allowance to you so that you pay less tax (presuming you earn between £11,501.00 and £45,000.00)
As this is fairly new and unknown the Revenue are allowing people to backdate to any tax year from 5th April 2015.
It’s very easy to register; you simply go onto the Gov.uk site and type in marriage allowance.
Do it, you have nothing to lose!
Two jobs? Don’t worry this is a common issue we come across
Say for example you have had one job for a while and you have been on the standard 1150L tax code. When you start your new job you should be asked to fill in a starter checklist form (you would tick box C on the present circumstances section – I have another job). For the first pay period your employer should then put you on BR (as explained previously this means you will be taxed 20%). When HMRC receive the submission from your new employer they will they re-issue a new code. This should be split between your two jobs.
What if you believe your tax code is incorrect?
If you believe your tax code is incorrect then you should phone HMRC on the income tax helpline – 0300 200 3300. You will then be asked to explain your circumstances, should HMRC believe that your tax code is incorrect then they will re-issue a new one that day. Unfortunately no one else can ring on your behalf regarding your tax code as it is a personal matter, not even your employer. I know from experience people are put off phoning HMRC because of the wait times, but at the end of the day if you want your tax code sorting then this is something that is worth putting the time and effort into.
I hope this has explained some of the uncertainties around the tax code, why not check your payslip now to see what your tax code is, you never know it may be wrong?