Everything you need to know about your Tax Code
The tax code is fundamental to the operation of the PAYE system. Tax codes are codes used by employers and pension providers to calculate the amount of tax to be taken from an individual’s pay or pension. In the UK, every employee who is registered under the PAYE scheme is given a tax code by HMRC. Tax codes usually consist of a number followed by a letter.
You’ll be able to see your tax code on your payslip. The code determines the amount of PAYE (Pay as You Earn) tax you’re liable to pay on your salary – having the wrong tax code could lead to overpayment of tax.
Numbers
The number represents the employer or pension provider how much tax-free income you will get in the tax year which is based on your personal allowance, the amount of income you can have before your tax. Using 1060L as an example, 1060 refers to the the tax-free personal allowance is £10,600 which is divided by 10. Where the deductions exceed the allowances, the number element represents notional additional pay.
Letters
The letters in the tax code reflect the taxpayer’s personal circumstances and how this impacts on the personal allowances that they receive. The suffix codes are as follows:
• L – The employee is entitled to the standard tax-free personal allowance.
• M – The employee has received the marriage allowance from their spouse or civil partner.
• N – The employee has transferred the marriage allowance to their spouse or civil partner.
• T – The tax code includes other calculations in order to work out the personal allowance.
Where deductions exceed allowances, the code has a K prefix (a ‘K code’).
The standard personal allowance is set at £12,500 for 2020/21.
Special codes
Instead of the usual letter and number format, an employee may have one of the following special codes:
• BR – Basic Rate is when all your income from your job is taxed at 20%. This is normally used if you’ve got more than one job.
• D0 – Higher Rate is when all your income from your job is taxed at 40%. This is normally used if you’ve got more than one job.
• D1 – Additional Rate is when all your income from your job is taxed at 45%. This is normally used if you’ve got more than one job.
• 0T – These means your Personal Allowance has been used up or if you’ve started a new employment and haven’t given them your P45.
• NT – You’re not paying any tax on income
Emergency Code
Emergency tax codes are temporary codes which assume that you are only entitled to the basic Personal Allowance. Because an emergency tax code does not take into account any other allowances, reductions, or reliefs you are entitled to, emergency tax can be up to 50% of your monthly wage or income.
You will be given an emergency tax code if HMRC cannot access all the information they need to calculate your tax code correctly.
An employee or pensioner may be given an emergency code if they start a new job, starting work for an employer after being self-employed or if they receive the state pension. The emergency code will be W1 or M1.
Check your code
Tax codes are typically adjusted once a year in line with any changes made in the National Budget. However, tax codes can also be altered at additional intervals if the employee’s circumstances change
If you think your tax code is wrong, you can contact HMRC by phone on 0300 200 3300. Changes to your personal circumstances can also be updated via your accountant.
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