Open up your payslip and it will probably be a sea of information you don’t quite understand. It’s easy to focus on the amount you’ll actually be taking home after tax, national insurance and other deductions. But there is one very important combination of numbers and letters which you shouldn’t ignore. It’s the tax code, and you need to make sure it’s correct.
The tax code that is displayed in your payslip is the code sent by HM Revenue and Customs (HMRC) to your employer to work out how much income tax that needs to be taken from your pay or pension.
Numbers in your Tax Code
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 1250L as an example, 1250 refers to the tax-free personal allowance is £12,500 which is divided by 10. This can change each tax year due to personal allowance increases.
Letters in your Tax Code
The letters in your tax code refers to your current situation.
| 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. |
| 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. |
| L | This is a common tax code which entitles you to a basic tax-free allowance |
| K | This means you have income that isn’t being taxed another way making it worth more than your tax-free allowance. This can happen if you’re paying tax you owe from a previous year or getting certain benefits. |
| M | Marriage Allowance means you receive a transfer of 10% of your partner’s Personal Allowance |
| N | Marriage Allowance means you’ve transferred of 10% of your partner’s Personal Allowance |
| NT | You’re not paying any tax on income |
| T | Other calculations are included in your tax code to work out your Personal Allowance. This can be because your income is over the amount of basic rate tax |
| Y | If you were born before 6 April 1938 and are entitled to a bigger tax-free allowance. |
Emergency Tax Codes
Emergency tax codes are temporary codes that are based on what you pay in the current pay period rather than the whole year which may happen when starting a new job.
| M1 | Emergency tax if paid monthly. |
| W1 | Emergency tax if paid weekly. |
Updating your tax code
You may be put on an emergency tax code if you change jobs. HMRC will correct it automatically after you’ve given your employer details of your previous income or pension. Your employer will get these details from your P45 – if you do not have one, they should ask you for further information.
HMRC will also update your tax code when:
- you’ve started to get income from an additional job or pension
- your income has changed
- you’ve started or stopped getting benefits from your job
- you get taxable state benefits
- you claim Marriage Allowance or expenses that you get tax relief on
After your tax code changes
HMRC will adjust your tax code so you pay the right amount of tax across the year. They’ll write to you or email you when your tax code has been updated.
Then they will tell your employer or pension provider that your tax code has changed, and your next payslip should show:
- your new tax code
- adjustments to your pay if you were paying the wrong amount of tax
You can also tell HMRC about a change that affects your tax code by calling on 0300 200 3300.
Checking your tax code
To make sure you’re on the right tax code, check your code matches the Personal Allowance you should be getting and see if you’ve paid the right amount.
- If you think you’ve paid too much tax
You can check if you’re due a refund on the HMRC website or use the HMRC online tax checker. Depending on your circumstances, you may be able to ask for a refund using a form, or you may need to contact HMRC directly.
- If you think you haven’t paid enough tax
If you think you’ve underpaid tax, then let HMRC know. They may alter your tax code for the next financial year and claim the money back from your salary, though this will only be up to £3,000.
Otherwise, tax still due for the last tax year must be paid by 31 January following the end of the tax year in which the income was earned. So, if you owe tax for 2019/20, you’ll need to pay it by 31 January 2021.
If you are still not sure that your tax code is correct or whether you need to submit Tax Return or not, please feel free to contact Outsourced ACC on 0208 249 6007, our team will be happy to assist you.
Written by Irina Stucere