A tax code is a personalised code used by employers and pension providers to determine how much income tax to deduct from your salary or pension. It’s essentially a shorthand way for the government to communicate your tax-free allowance to your employer.
What does a tax code mean?
A tax code is made up of letters and numbers, which is supplied by HMRC to your employer in order for them to know how much tax it to be deducted from your pay.
The numbers in your tax code represent your personal allowance, which is the amount of income you can earn each year without paying any income tax. The letters in your tax code indicate any additional factors that affect your tax bill, such as state pension income, untaxed interest, or company benefits.
The most common tax code in the UK is 1257L. This means that you have a personal allowance of £12,570 and no other adjustments are needed.
Here’s a list of the different tax codes that exist in England, and a brief description of what each one means:
- L – You’re entitled to the standard tax-free personal allowance
- M – You receive ten per cent of your partner’s Personal Allowance
- N – You’ve transferred ten per cent of your Personal Allowance to your partner
- T – Here your tax code includes other calculations to work out your Personal Allowance
- 0T – This means your Personal Allowance has been used, or you’ve started a new job and your employer doesn’t have all the details needed to give you a tax code
- BR – All your income from your job or pension is taxed at the basic rate
- D0 – All your income from your job or pension is taxed at the higher rate
- D1 – All your income from your job or pension is taxed at the additional rate
- NT – This code means that you’re not paying tax on this particular income
If you are unsure what your tax code means or believe it is incorrect, you can use the government’s tax code checker here.
How often should you check your tax code?
It is recommended that you check your tax code every April (when the tax year changes). You should also check it when you received your first pay slip from a new job. There are also a few expected reasons why HMRC may change your tax code, and if you apply to any of the following, you should check that it’s correct too:
- you start to get income from an additional job or pension
- your weekly State Pension amount changes
- your employer tells HMRC you have started or stopped getting benefits from your job
- you get taxable state benefits
- you claim Marriage Allowance
- you claim expenses that you get tax relief on
What is an emergency tax code?
If your tax code ends in ‘W1’ or ‘M1’ or ‘X’ you’re on an emergency tax code. HMRC may put you on an emergency tax code if it does not get your income details in time after a change in circumstances such as; a new job, working for an employer after being self-employed or getting company benefits or the State Pension.
Emergency tax codes are temporary and HMRC will usually update your tax code when you or your employer give them your correct details. This may result in a tax rebate if you have overpaid, but if you haven’t paid enough, you’ll stay on the emergency tax code until you’ve paid the correct tax for the year.
Greenwood Tax and Accounting offer a wide range of bookkeeping, payroll, and accounting services to all kinds of businesses from sole traders, landlords, not for profit organisations and many more.
To find out more about how we can help you, book a call with Kathryn today.
