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Understanding your tax Code

Posted 12 October 2015

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It’s really important to understand your tax code. Have a look at our guide to help you figure out yours, and what to do if you think it’s wrong!


According to the The Guardian, there are 29.3 million taxpayers in the UK. That’s 29.3 million people contributing to education, health, defence and general the running of the country. But how much do you actually know about the numbers and letters that dictate how much tax you pay? We’ve put together a mini-guide so you can get to know your tax code and what it means to you.


What is a Tax Code


To find your tax code you just need to have a look at your payslip. You’re looking for a code that’s usually a mixture of about four numbers and one or two letters. For example, one of the most common tax codes in the country is 1060L. In fact, if you have only one job and you were born after 5 April 1938, your tax code will most probably be 1060L.


The numbers


The numbers that you see at the start of the code refer to the amount of income you’re allowed to earn, before you become required to pay tax. . And, it’s HM Revenue and Customs (HMRC) who are responsible for working out how much tax free personal allowance you’re entitled to. So, if your tax code is 1060L, you simply  multiply the number by ten to work out how much money you can earn before tax becomes payable.  Going back to the 1060L example above, you can see that you’d be allowed to earn £10,600 before starting to pay income tax.


The letters


Now, the letter or letters in the code refer to your specific circumstances. People are grouped according to how much tax free personal allowanced they get, and the numbers show which group you fall into. For example, if there is an L at the end of the code, then you are allowed the basic allowance. But if the code ends with NT, it means that you’re not paying any tax on the income at all. For a full list of the letters and their meanings have a look at the Government's website.


If you’re on a low income, and you’d like more detailed information about tax codes and how they work TaxAid might be a good place to start. If you need help and you’re not on a low income, the Citizen’s Advice Bureau is your best bet.   


Changes in tax codes


It’s highly unlikely that your tax code will stay the same throughout your life. Soif you’ve noticed it changing it doesn’t necessarily mean that it is wrong. There are a number of reasons why it can change, for example, perhaps you’ve started receiving benefits at work that you need to pay tax on, or you’ve recently married. . Bear in mind that your tax code can also change if you need to pay money back from previous tax years.




Emergency Tax


Emergency tax often comes into play when you change your job. If all goes to plan, when you leave your current employer, you’ll be given your updated P45. You then give this to your new employer so they know exactly what tax you’ve paid and what tax code you are currently on. As you can imagine, there can sometimes be delays in the processing of this information and, in these cases, the new employer will give you an emergency tax code until HMRC supply them with the correct one.  


If your code is one of the following:


  • 1060L W1
  • 1060L M1
  • 1060L X


…you are on an emergency tax code, and that means that the personal allowance allocated to you could be incorrect. Don’t worry though, emergency codes are only temporary and, if you have overpaid tax, you should receive the money back.



I think I have the wrong code


As with almost anything in this life, occasionally errors can creep in, which could end up with you being on the wrong tax code and either over or underpaying tax. If you think that you are on the wrong code, you can check using this calculator, which will give you a rough idea of what you should be paying. It’s really important to make sure that you use the correct figures, if you intend on using one of calculators. And, bear in mind that it will only provide an estimate, you do need to check with the Tax Office as well to be absolutely sure.



What if I’ve overpaid?


If you find out that you have been over paying tax then you should receive what’s known as a rebate, which means you’ll get the money back. Give HMRC a call on 0300 200 3300 or have a look here to find out how to claim a refund.


If you have overpaid during the current tax year, that money should be refunded to you via your wages. But if it is an overpayment going back to previous tax years, a cheque for the amount you’ve overpaid will be sent out to you.



What if I’ve underpaid?


Of course it can work the other way around, with some people finding out that they have underpaid on their tax. Even if this has been going on for years, and you didn’t know that you were underpaying because your employer put you on the wrong code, you still by law have to pay the money back. This is because HMRC states that it is each individual’s tax payments are their own responsibility.


There are some cases where your debt to the taxman could be written off, especially if HMRC failed to tell you that you underpaid within twelve months of the tax years end. Nothing is guaranteed of course, but if enough time has passed then you could try and apply for the money to be written off.


If you need to appeal the amount you are being asked for in tax then click here.



PAYE Coding Notice


If your tax code is about to change during a tax year, HMRC should send you notification of this, known as a PAYE coding notice. If you receive one, take a look so that you know what tax code you are on. There’s is no need to do anything with it though unless you believe that it’s incorrect.


The positive number show you what you are allowed to get tax free and the negative numbers show the amount you will be taxed on – this will taken automatically out of your wage by your employer as normal.


Taxes may seem complicated, but at the end of the day HMRC have a way of working everything out and it does us good to learning how the system works can help stop you under or overpaying more than you need to. And, if you have a good idea of what you should be paying, you can raise issues if you think that your code is wrong and have a better understanding of the tax information that you receive from HMRC and your employer. 

by Christine Walsh

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