Tax can often be challenging to wrap your head around, from self-assessments, business expenses, and the various tax codes in the UK, each of which have their own implications.
That’s why we’ve created this ultimate guide to tax codes, making the complex clear.
What is a Tax Code?
To start, let’s take a look at what a tax code actually is.
A tax code is simply a combination of numbers and letters assigned to you by HMRC that indicates how much Income Tax and National Insurance you must contribute.
Essentially, a tax code signifies the level of tax-free earnings you are entitled to within a given tax year- also known as your ‘personal allowance’. Any income above this threshold is subject to taxation.
Who Receives a Tax Code?
Individuals who are employed or receive payments through PAYE (Pay As You Earn) will receive a tax code from their employer via HMRC. This tax code will be displayed on their payslip.
Please note: sole traders do not have a tax code as they do not pay themselves through PAYE.
What Should My Tax Code Be?
Determining the appropriate tax code can be a challenging task, as it is unique to each person’s circumstances. As outlined in this guide, several factors contribute to your tax code, including your:
- Personal allowance
- Income from other sources
- Taxable benefits
- Outstanding tax liabilities from previous years
- Other considerations
HMRC typically issues an annual tax coding notice, along with explanatory documents that shed light on why your tax code may differ from the standard code for the current year.
If you haven’t received a tax code notice, you can use the government website to find out your tax code, but please note that this tool is only applicable if you are employed and paid via PAYE.
What Should I Do if My Tax Code is Incorrect?
If you believe that your tax code is incorrect, such as HMRC including taxable benefits from previous years that you no longer receive, it is important to contact HMRC directly to discuss the matter and request an amended tax code.
Remember, it is crucial to ensure that you are on the correct tax code, as being on the wrong one can result in either overpaying or underpaying your taxes.
What Does the Tax Code Number Mean?
Your tax code begins with a number. This number refers to the personal allowance you are entitled to (and is divided by ten).
For example, if your tax code is 1257L, you can earn £12,570 before your income becomes taxable.
What Does the Tax Code Letter Mean?
After the number, your tax code will be followed by a single letter, or multiple. This refers to your individual circumstances and how your personal allowance is affected.
Common Tax Codes Letters and What They Mean
There are a number of UK tax codes, each of which mean something different. Here they are at a glance:
- L: You’re entitled to the standard tax-free Personal Allowance (£12,570 for 2023/24)
- M: You’ve received 10% of your partner’s Personal Allowance
- N: You’ve transferred 10% of your Personal Allowance to your partner
- T: Your tax code includes other calculations to determine your Personal Allowance
- 0T: Your Personal Allowance has been used or you’ve started a new job and your employer doesn’t have the details they need
- BR: All income from this job is taxed at the basic rate of Income Tax (20%)
- D0: All income from this job is taxed at the higher rate of Income Tax (40%)
- D1: All income from this job is taxed at the additional rate of Income Tax (45%)
- NT: You’re not paying any tax on this income
- S: Your tax is based on rates in Scotland
- C: Your tax is based on rates in Wales
K Tax Code Explained
Having a K tax code indicates that the amount you owe HMRC in tax deductions from previous years exceeds your Personal Allowance. Several factors can lead to this situation, but the most frequent cause is receiving benefits from your employer, such as a company car, which affects the calculation of your Personal Allowance.
Emergency Tax Codes
An emergency tax code is used when HMRC has not yet worked out which tax code applies to your circumstances as a temporary measure.
Here are some reasons why you might be given an emergency tax code:
- You’re starting your very first job
- You’ve started a new job and haven’t got your P45 from your old employer
- You’ve become an employee (and are now paid via PAYE) after being self-employed
- You get company benefits (like a company car)
- You receive the state pension
If you’ve been placed on emergency tax by your employer, your tax code will typically be one of the following:
- 1257 W1
- 1257 M1
- 1257 X
Tax Guidance at Ryans
At Ryans Chartered Accountants, we can provide personalised guidance to ensure that individuals are on the correct tax code, minimising the risk of overpaying or underpaying taxes.
With our professional assistance, you can have peace of mind knowing that your taxes are in capable hands. Get in touch with our team today to find out more.