Unsure of the meaning of your tax code? The amount of money you must return to the taxman each year in the UK depends on a set of tax codes.
If you have a job or pension, you need to pay taxes and, thus, need to understand how tax codes work. But even in the best of circumstances, understanding tax can be challenging due to self-assessment, business costs, or the numerous UK tax codes. Each of these has a unique effect.
So let’s get right to it and give you the information you’re probably seeking: a straightforward explanation of UK tax codes that will help you grasp what yours entails.
To inform HMRC of the correct income tax and national insurance amount to be paid, you are assigned a tax code: a collection of numbers and letters.
The personal allowance, commonly known as the tax-free income an employee should get in a single tax year, is specified in the tax code. Anything made more than this is taxed.
In 2020–21, the tax code 1250L was the most popular for workers with only one job. L stands for the normal personal allowance, while 1250 is based on the Personal Allowance for 2020–21 (£12,500).
To find your tax code for the current year, visit your Personal Tax Account and use the Income Tax online service. Additionally, you can see your tax code for:
If you don’t already have an account, you’ll be prompted to sign up with Government Gateway. After logging in, you may also view:
Your payslip or a tax code letter from HMRC may also contain your tax code.
There are various UK tax codes, each with a unique meaning. Here they are, in brief:
The tax codes in the UK are usually composed of a string of numbers and a letter if you look at the list of them. L is the most common letter.
Since you are under 65, you are qualified for the standard tax-free personal allowance, which is the maximum amount you can make before being subject to income tax.
For those low- and middle-income workers with an annual income of less than £100,000 in 2022–23 (the tax year runs from April to April each year), the basic personal allowance is £12,570.
The precise permitted amount (divided by 10) in your code will come before the letter. Therefore, 1257L will be one of the most popular codes for the 2022–23 fiscal year.
The T code means other computations have been made into your personal allowance. Meanwhile, the tax code 0T means you do not have a tax-free personal allowance.
The major reasons for receiving the tax code 0T are:
If you had the BR emergency tax code instead of the 0T tax code, you would pay the same amount of income tax. Depending on your income, you will have to pay a certain amount.
Usually, all of your taxable income is subject to an income tax of 20%. If you pay more taxes, this percentage will rise to at least 40%.
The “Marriage Allowance,” which should not be confused with the “Married Couple’s Allowance,” entitles employees to transfer £1,100 of their personal allowance to their spouse, civil partner, or former spouse.
If an employee’s application is approved, HMRC will issue revised tax codes for each party that take the additional allowances into account. The extra allowance recipient will be given an M tax code, for example, 1166M. A tax code ending in N, such as 1034N, will be given to the person who is giving up a portion of their allowance.
You shouldn’t change anyone’s tax code for payroll purposes until you receive authorisation from HMRC.
You may apply for an M or N tax code if:
A BR, D0, or D1 tax code indicates that you are receiving no personal allowance. Contact HMRC if you are on any of these codes and it is not a result of second employment.
The Basic Rate, or BR, means that all of your income from this source is subject to a 20% tax. The code is typically used temporarily until your employer has all the information needed to provide you with the proper tax code and apply the appropriate income tax deductions.
In a D0 tax code, all of your income is taxed at the higher rate of 40%, while in a D1 tax code, all income from your current employment or pension is taxed at the higher rate of 45%. This may change in the future because tax rates are subject to change each tax year.
NT denotes that there is no income tax due. HMRC has given your employer the go-ahead to withhold no taxes from this source of income.
When an employee is deployed on an assignment outside of the UK and is no longer a UK tax resident, NT Codes are typically supplied to payroll.
Applying an NT code relieves the employer of the need to run PAYE on wages related to work performed outside the UK. However, this does not affect national insurance contributions, which must be examined independently.
It is crucial that the necessary documents are finished and transmitted to HMRC before the employee starts their assignment since NT codes should take effect as of the departure date to avoid double taxation.
HMRC has recommended that a letter with the necessary details will be sufficient. However, in some circumstances, HMRC still demands that a departure form P85 be filled out.
An emergency tax code will typically end with M1 or W1, which means that your tax is non-cumulative and will be determined based on your pay this period rather than your total earnings for the year.
If you are paid every month, M1, and if you are paid every week, W1.
You can change your employment information using the Check Your Income Tax online service if you believe your tax code is incorrect.
It would help if you also got in touch with HMRC, who will send an updated tax code to your company as needed.
You can also inform HMRC of any income changes that might have impacted your tax bracket.
Tax relief is available on private pension contributions totalling up to 100% of your yearly income.
Your pension provider will claim the tax relief and contribute it to your pension pot (referred to as “relief at source”) if your employer deducts workplace pension contributions from your pay before withholding income tax or if your income tax rate is 20%.
Your pension provider will file a tax relief claim for you at a rate of 20% if your income tax rate in Scotland is 19%. The discrepancy is not due to you.
If you own a business there are various types of tax reliefs that you can also claim for your business such as:
If you are an innovative business and you are trying to develop a new product, software or service then you may be entitled to claim for research and development.
There are various types of businesses that can claim RD Tax such as:
The tax code in Scotland is identical to that in England and Northern Ireland but begins with the letter S. S1257L, for example.
The Welsh Government set the Welsh rates at the same level as in England and Northern Ireland for the tax year 2019 to 2020, which began on April 6, 2019, so customers won’t notice a difference in their income tax.
Any income that is not subject to taxation under any other heads of income and that is not to be subtracted from the total income is taxed as residuary income under the heading “Income from Other Sources.”
If your tax-free income changes, your tax code also changes. That might be due to a modification in the taxable benefits you receive, like ceasing or beginning to use a company car.
You can verify your tax code in your online personal account. Your PAYE documents from your employer, such as your payslips, annual P60 tax summary, or the P45 you receive after you leave a job, should also contain your code.
Tax codes can force any person to pay a large amount of tax, particularly when the tax changes abruptly or the outcome is incorrect.
You must assume full responsibility for resolving any errors in your taxes, even if they are not your fault. You would have expected to learn about this if HMRC had actually misread your coding.
If your tax code is incorrect, you could be paying the wrong taxes, which could subsequently cause serious financial problems.
Remember that underpaying taxes is worse than overpaying taxes. This is why it’s crucial to understand what the tax code does.
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