Everything you ever needed to know about your Tax Code
A tax code is a little set of numbers and a letter assigned to you by HMRC that appears on your PAYE payslip, which can have a profound impact on your earnings. Its important then, to understand why this is so and how to ensure it is correct. This is what this article aims to achieve, so read on, you may even find out that HMRC owes you money!
First of all, where can you find your Tax Code?
There are usually five sources that provide your tax code. The most obvious one is on your payslip. It will resemble something like “1257L”. Obviously, the code will be representative of your personal tax circumstances.
The second place you’ll find it is in the letter of coding that HMRC issues you by post when your tax code changes.
Third, via your HMRC personal tax account, found at the following link if you wish to register:
https://www.gov.uk/personal-tax-account
Forth, on your end of tax year P60. And Fifth, on your P45 if you change your job.
What is a tax code? Really.
There are two parts to the tax code: the numbers and the letter.
The numbers are there to tell your employer how much tax allowance you are entitled to. This is the amount you can earn before tax is applied at the various tax bands published. Simply multiply the number in the code by 10. So, if your tax code is 1257L, this tells your employer that the first £12,570 of your salary is tax exempt. So, if you earn £30,000 per year, your taxable income is £30,000 - £12,570 = £17,430.
There are various reasons why this number may vary in your particular circumstances and this will be covered later. But for most people with simple tax affairs, “1257L” will be a common tax code through the tax year 2022/2023 as this is the threshold set by the government for the personal tax free allowance.
The letter in the code refers to your personal circumstances and how they affect your personal allowances. For instance:
L - Means an employee entitled to the standard tax-free personal allowance.
0T - Where no personal allowance is available. Perhaps the employee hasn’t submitted a P45 and so there’s no information to calculate a tax code.
BR - For income at the basic rate but used for a second job or pension.
NT - No tax is deducted. Used for occupations that are exempt from PAYE, such as musicians.
W1 or M1 - These are emergency tax codes. They are used to calculate your tax only on what you have paid in the current pay period, not the whole year.
K - If you have this letter in your code, it means you are due deductions maybe because of company benefits, state pension or tax you
owe from previous years and these are greater than your personal allowance. So, for example if your tax code is “K525'' and your income is £30,000, you have a taxable income of £30,000 + £5.250 = £35,250.
There is a much larger list of tax coding letter explanations available on the government’s site here. These detail specific codes for Wales and Scotland too.
If the government sets my tax code, why would I need to check it?
Quite simply, mistakes are made. You may make a mistake in reporting aspects of your salary, pension, expenses, benefits, etc. Only by thoroughly working through your personal tax circumstances, ideally with your employer if you are a PAYE employee, can you be sure your tax code is correct.
The situation can get more complex if you have a second job, as the tax code for that will be different to your main job where your personal tax allowances are usually applied. This is why under some circumstances, it’s a good idea for a tax expert such as TaxAgility to check through your income, expenses and coding to make sure you are paying the correct amount, and if you are due any refunds.
I just received a PAYE coding notice in the post, what does that mean?
Typically, you will receive a notice of tax coding in January or February, to allow time for your employer to update your PAYE ready for the new tax year in April. Saying this, if there are no changes to your code and there is only the uplift to consider for the New Year, HMRC will not send you anything. You could receive a notice of coding at any time if your personal circumstances or the tax rules change, or if HMRC feel there are issues with your tax payments.
This is why it’s really important to check the new coding you receive against what you might expect. If you don’t, you may find yourself having to challenge HMRC and either claim back overpayments or find yourself owing tax. Neither situation is particularly fun.
Note: HMRC will not send you a code via post every year if there are no changes or just the uplift to consider.
Why might my tax code change?
As we mentioned earlier, there are numerous reasons why your tax code may change, these may include:
- Your tax code has been updated, perhaps because of information you or your employer provided, or the tax rules have changed, as they can do each tax year.
- You’ve started a new job, but your employer hasn’t received P45 information. This means they cannot calculate your tax payments. HMRC will impose an emergency tax code until this is resolved. If subsequently you find that this means overpayment, you’ll have to claim that back, most likely through your coding, which means your coding may change again until you have reached your regular tax payment band.
- You receive income from a second job or pension. Where your main job uses up your personal tax allowance, the tax code on your second job will be different.
- When your income changes, earning more or less can affect the tax you are liable for.
- Benefits within your job impact coding, so this may change when you begin to receive them or stop receiving them. Benefits include such things as company cars, certain types of expenses, phones, etc.
- You may be eligible to certain types of state benefits, such as the state pension, widow’s pension, widowed parent’s allowance, bereavement allowance, incapacity benefit, employment and support allowance and carer’s allowance. When these start or stop, your coding will most likely change.
What happens if you’ve paid too much tax?
This can happen, especially if you are moving between jobs, have more than one job, or receive or stop receiving any kind of benefits, state or otherwise.
If you think you may have paid too little tax, you need to let HMRC know as soon as possible. The difference will likely be claimed through your tax coding. However, this is only done for sums up to £3000. More than that and you’ll need to pay them directly. In any case, any tax due will need to be paid fully by 31 January following the end of the tax year in which the income was earned - e.g. if you owe HMRC tax for the 2021/2022 tax year, it needs to be paid in full by January 31st 2023.
If you’ve paid too much tax there is an online tax refund service that can be found here. https://www.gov.uk/claim-tax-refund.
The reasons HMRC cite as possible cause of overpayment are:
- Pay from a job
- Job expenses such as working from home, fuel, work clothing or tools
- A pension
- A Self-Assessment tax return
- A redundancy payment
- UK income if you live abroad
- Interest from savings or payment protection insurance (PPI)
- Income from a life or pension annuity
- Foreign income
Essentially, once complete, they will use the information you provide to perform their own calculations and arrive at a figure, hopefully the same as yours. If they agree, they may issue a cheque or make a payment into your bank account.
I have two jobs and two tax codes, now what?
This also applies if you are receiving a pension as well as working. HMRC will determine which of the two jobs is your main job and use this to apply any personal tax allowances. If you don’t agree with this, you’ll need to contact HMRC and request that your allowances are moved to the other job or the pension if that’s more important to you.
If your primary job uses up all of your tax allowances then your second income employer will most likely be instructed to tax your income at the basic rate or higher rates of tax accordingly. This means that all of this second income will be taxed. This is usually done through the tax codes “BR” and “D0”.
How do expenses from my job affect my tax code?
It’s certainly not uncommon, as an employee, to find yourself having to pay out for things you need in your job. Most of the time, your employer will reimburse you for legitimate expenses and it won’t affect your tax coding.
If you do incur expenses that are not reimbursed by your employer and they are essential to your job, HMRC may include these in your allowance calculation. This might include such expenses as:
- Traveling costs - those needed to do your job, including food and accommodation. However, traveling to and from work - i.e. the normal cost of computing is considered a private expense and not considered.
- Professional subscriptions, such as those associated with a professional industry body and that allow you to do your job - e.g. as a lawyer, accountant, surveyor, etc.
- Clothing, such as safety clothing.
- You cannot claim for things that your employer may have provided an alternative for and for things that you do not use in your private life.
Claims can be made up to four years of the end of the tax year in which you spent the money. Bear in mind that you will have to keep good records and receipts, as HMRC may challenge the validity of your claim.
If your claim is up to £2,500, you can use form P87. PAYE employees don’t usually have to complete an SA100 Self Assessment Tax Return. However, where you are owed tax through expense claims, you can also choose to submit an SA100 detailing your income and expenses. It’s likely that the amount owed will be paid back through your tax code, either in the current tax year or the next one.
If the amount to be claimed is over £2500, then you will have to use a self-assessment tax return. For those who have not done this before, you’ll first need to register with HMRC.
A full list of allowable expenses can be found on the government site on allowable expense claims here.
Why not let TaxAgility ensure your personal taxation is correct
Most of the time regular employees can most likely work out their tax coding issues through their employer. However, for more complex cases with additional sources of income beyond your day job are concerned or where you may be self-employed. It’s a good idea to let a professional tax advisor assist you.
Mistakes can be costly, as they may represent situations where income from other sources have not been fully taken into account, rendering you liable not just to unpaid taxes, but also penalties too; and these can be substantial.
If in doubt, ask an expert to help. So give us a call today on 020 8108 0090, and find out how we can help.
